Main Dacument

CHAPTER-I
INTRODUCTION
INTRODUCTION
Meaning:
Capital Budgeting decisions pertaining to fixed /long term assets which by definition
refer to assets which are in operation, and yield a return, over a period of time, usually
exceeding one year. They, therefore involve a series of outlays of cash resources in return for
anticipated flow of future benefits.
Importance:
Capital budgeting also has a bearing on the competitive position of the enterprise
mainly because of the fact that they relate to fixed asset. The fixed asset represents a true
earning asset of the firm. They enable the firm to generate finished goods that can be
ultimately being sold for profits.
The Capital Expenditure decision has its effects over a long time span and inevitable
affects the companys future cost structure.
The Capital investment decision once made are not easily reversible without much
financial loss to the firm because there may be no market for second-of hand plant and
equipment and their conversion to other uses may most financially viable.
Capital investment involves cost and the majority of the firms have search capital
resources.
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 long- term
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 HERO MOTO CORP
LTD 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:
Whether or not funds should be invested in long term projects such as settings of
an industry, purchase of plant and machinery etc.,
Analyze the proposals for expansion or creating additions capacities.
To decide the replacement of permanent assets such as building and equipments.
To make financial analysis of various proposals regarding capital investment so

as to choose the best out of many alternative proposals.
OBJECTIVES OF THE STUDY:

The study on capital budgeting in HERO MOTO CORP LTD A case study is
based on the following objectives.
1. To evaluate the capital budgeting practices relating to various projects of HERO
MOTO CORP LTD Hyderabad
2. To Assess the long term requirements of funds and plan for application of internal
resources and debt servicing.
3. To Assess the effectiveness of long term investment decisions of HERO MOTO

CORP LTD
4. To offer conclusion derived from the study and give suitable suggestions for the
efficient utilization of capital expenditure decisions.
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, 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.
.
LIMITAIONS OF THE STUDY:

1. The study is limited to HERO MOTO CORP LTD only.
2. The study is limited to certain projects of HERO MOTO CORP LTD only.
3. Period of the study is restricted to five years only.
LITERATURE REVIEW
Factors Affecting Capital Budgeting:
While making capital budgeting investment decision the following factors or aspects
should be considered.
The amount of investment
Minimum rate of return on investment (k)
Return expected from the investments. (R)
Ranking of the investment proposals and
Based on profitability the raking is evaluated I.e., expected rate of return on

investment.
Factors Influencing Capital Budgeting Decisions:

There are many factors, financial as well as non-financial, which influence that
Budget decisions. The crucial factor that influences the capital expenditure decisions is the
profitability of the proposal. There are other factors, which have to be in considerations such
as.
Urgency:
Sometimes an investment is to be made due to urgency for the survival of the firm or
to avoid heavy losses. In such circumstances, the proper evaluation of the proposal cannot be
made through profitability tests. The examples of such urgency are breakdown of some plant
and machinery, fire accident etc.
Degree of Certainty:
Profitability directly related to risk, higher the profits, Greater is the risk or
uncertainty. Sometimes, a project with some lower profitability may be selected due to
constant flow of income.
Intangible Factors:
some times a capital expenditure has to be made due to certain emotional and
intangible factors such as safety and welfare of workers, prestigious project, social welfare,
goodwill of the firm, etc.,
Legal Factors.
Any investment, which is required by the provisions of the law, is solely influenced
by this factor and although the project may not be profitable yet the investment has to be
made.
Availability of Funds.
As the capital expenditure generally requires large funds, the availability of funds is
an important factor that influences the capital budgeting decisions. A project, how so ever
profitable, may not be taken for want of funds and a project with a lesser profitability may
be some times preferred due to lesser pay-back periodfor want of liquidity.
Future Earnings
A project may not be profitable as compared to another today but it may promise
better future earnings. In such cases it may be preferred to increase earnings.
Obsolescence.
There are certain projects, which have greater risk of obsolescence than others. In
case of projects with high rate of obsolescence, the
project with a lesser payback period
may be preferred other than one this may have higher profitability but still longer pay-back
period.
Research and Development Projects.

It is necessary for the long-term survival of the business to invest in research and
development project though it may not look to be profitable investment.
Cost Consideration.
Cost of the capital project, cost of production, opportunity cost of capital, etc. Are
other considerations involved in the capital budgeting decisions?
RISK AND UNCERTANITY IN CAPITAL BUDGETING

All the techniques of capital budgeting require the estimation of future cash inflows
and cash outflows. The future cash inflows are estimated based on the following factors.
1. Expected economic life of the project.
2. Salvage value of the assets at the end of economic life.
3. Capacity of the project.
4. Selling price of the product.
5. Production cost.
6. Depreciation rate.
7. Rate of Taxation
8. Future demand of product, etc.
But due to the uncertainties about the future, the estimates of demand, production,
sales, selling prices, etc. cannot be exact. For example, a product may become obsolete
much earlier than anticipated due to unexpected technological developments. All these
elements of uncertainty have to be take in to account in the form of forcible risk while
taking on investment decision. But some allowances for the elements of the risk have to
provide.
The following methods are suggested for accounting for risk in capital Budgeting.
Risk-Adjusted cut off rate or method of varying discount rate:

The simple method of accounting for risk in capital Budgeting is to increase the cutoff rate or the discount factor by certain percentage on account of risk. The projects
which are more risky and which have greater variability in expected returns should
be discounted at a higher rate as compared to the projects which are less risky and
are expected to have lesser variability in returns.
The greatest drawback of this method is that it is not possible to determine
the premium rate appropriately and more over it is the future cash flow, which is
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uncertain and requires adjustment and not the discount rate.
Risk Adjusted Cut off Rate
Certainty Equivalent
Method
Decision Tree Analysis
Suggestions
Co-Efficient of
Accounting risk
Variation Method
In Capital Budgeting
Sensitivity Technique
Standard Deviation
Method
Profitability Technique
Certainty Equivalent Method:

Another simple method of accounting for risk in capital budgeting is to reduce expected cash
flows by certain amounts. It can be employed by multiplying the expected cash in flows
certain cash outflows.
Sensitivity Technique:
Where cash inflows are very sensitive under different circumstances, more than one forecast
of the future cash inflows may be made. These inflows may be regards as Optimistic,
Most Likely, and Pessimistic. Further cash inflows may be discounted to find out the
Net present values under these three different situations. If the net present values under the
three situations differ widely it implies that there is a great risk in the project and the
investors decision to accept or reject a project will depend upon his risk bearing abilities.
Probability Technique:
A probability is the relative frequency with which an event may occur in the future.
When future estimates of cash inflows have different probabilities the expected monetary
values may be computed by multiplying cash inflow with the probability assigned. The
monetary values of the inflows may further be discounted to find out the present vales. The
project that gives higher net present vale may be accepted.
Standard Deviation Method:

If two projects have same cost and there net present values are also the same,
standard deviations of the expected cash inflows of the two projects may be calculated to
judge the comparative risk of the projects. The project having a higher standard deviation is
set to be more risky has compared to the other.
Coefficient of variation Method:

Coefficient of variation is a relative measure of dispersion. If the projects have the
same cost but different net present values, relative measure, I,e. coefficient of variation
should be computed to judge the relative position of risk involved. It can be calculated as
follows.
Coefficient of Variation = Standard DeviationX100
Mean
Decision Tree Analysis:

In modern business there are complex investment decisions which involve a
sequence of decisions over time. Such sequential decisions can be handled by plotting
decisions trees. A decision tree is a graphic representation of the relationship between a
present decision and future events, future decisions and their consequences. The sequences
of event are mapped out over time in a format resembling branches of a tree and hence the
analysis is known as decision tree analysis. The various steps involved in a decision tree
analysis are
1
Identification of the problem
Finding out the alternatives;
Exhibiting the decision tree indicating the decision points, chance events, and other
relevant date;
Specification of probabilities and monetary values for cash inflows;
Analysis of the alternatives.
Limitations of Capital Budgeting

Capital Budgeting Techniques Suffer From the Following Limitations.
1
All the techniques of capital budgeting presume the various investment proposals
under consideration are mutually exclusive which may not practically be true in
some particular circumstances.
1. The techniques of capital budgeting require estimation of future cash inflows and
outflows. The future is always uncertain and the data collected for future may not be
exact. Obviously the results based upon wrong data may not be good.
2. There are certain factors like morale of the employees, goodwill of the firm, etc.,
which cannot be correctly quantified but which otherwise substantially influence the
capital decision.
3. Urgency is another limitation in the evaluation of capital investment decisions.
4. Uncertainty and risk pose the biggest limitation to the techniques of capital
budgeting.
STEPS INVOLVED IN THE CAPITAL EXPENDITURE

The various steps involved in the control of capital expenditure.
1. Preparation of capital expenditure.
2. Proper authorization of capital expenditure.
3. Recording and control of expenditure.
4. Evaluation of performance of the project.
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OBJECTIVES OF CONTROL OF CAPITAL EXPENDITURE

In the following all the main objectives are on control of capital expenditure: To
make an estimate of capital expenditure and to see that the total cash outlay is with in the
financial resources of the enterprise.
1. To ensure timely cash inflows for the projects so that non-availability of cash may
not be a problem in the implementation of the project.
2. To ensure all the capital expenditure is properly sanctioned.
3. To properly co-ordinate the projects of various departments.
4. To fix priorities among various projects and ensure their follow up.
5.
To compare periodically actual expenditure with the budgeted ones so as to avoid

any excess expenditure.
6. To measure the performance of the project.

7. To ensure that sufficient amount of capital expenditure is incurred to keep pace with
the rapid technological developments.
8. To prevent over expansion.
CAPITAL BUDGETING PROCESS

Capital Budgeting is a complex process as it involves decisions relating to the
investment of the current funds for the benefit to the achieved in future and the future always
uncertain. However, the following procedure may be adopted in the process of capital
budgeting.
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Capital Budgeting Steps:
Identification of Investment Proposals:

The capital budgeting process begins with the identification of investment proposals.
The proposal or idea about potential investment opportunities may originate from the top
management or may come from the rank and file worker of any department are from any
officer of the organization. The departmental head analyses the various proposals in the
light of the corporate strategies and submits the suitable proposals to the Capital
Expenditure Planning Committee in case of large organizations or to the officers
concerned with the process of long-term investment decisions.
Screening the Proposals:
The expenditure Planning Committee Screens the various proposals received from
different departments. The committee views these proposals from various angles to
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ensure that these are accordance with the corporate strategies or selection criterion of the
firm and also do not lead to departmental imbalances.
Evaluation of Various Proposals:
The next step in the capital budgeting process is to evaluate the profitability of
proposals. There are many methods that may be used for this purpose such as Pay Back
Period methods, Rate of Return method, Net Present Value method, Internal Rate of Return
method etc. All these methods of evaluating profitability of capital investment proposals
have been discussed.
Fixing Priorities:
After evaluating various proposals, the unprofitable or uneconomic proposals may be
rejected straight away. But it may not be possible for the firm to invest immediately in all the
acceptable proposals due to limitation of funds. Hence it is very essential to rank the various
proposals and to establish priorities after considering urgency, risk and profitability involved
therein.
Final Approval and Preparation of Capital Expenditure Budget:

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
lays down the amount of estimated expenditure to be incurred on fixed assets during the
budget period.
Implementing Proposal:
Preparation of capital budgeting expenditure budgeting and incorporationof a
particular proposal in the budget does not itself authorized to go ahead with the
implementation of the project. A request for the authority to spend the amount should further
to be made to the capital expenditure committee, which may like to revive the profitability
of the project in the changed circumstances.
Further, while implementing the project, it is better to assign the responsibility for
completing the project within given time frame and cost limit so as to avoid unnecessary
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delays and cost over runs. Network techniques used in the project management such as Pert
and CPM can also be applied to control and monitor the implementation of the project.
Performance Review.
The last stage in 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 of the same be
identified so that corrective action may be taken in future.
KINDS OF CAPITAL BUDGETING DECISIONS

The overall objectives of capital budgeting are to maximize the profitability of a firm
or the return on investment. These objectives can be achieved either by increasing revenues
or by reducing costs. This, capital budgeting decisions can be broadly classified into two
categories.
1. Increase revenue.
2. Reduce costs.
The first category of capital budgeting decisions is expected to increase revenue of the firm
through expansion of the production capacity or size of the firm by reducing a new product
line. The second category increases the earning of the firm by reducing costs and includes
decisions relating to replacement of obsolete, outmoded or worn out assets. In such cases, a
firm has to decide whether to continue the same asset or replace it. The firm takes such a
decision by evaluating the benefit from replacement of the asset in the form or reduction in
operating costs and the cost\ cash needed for replacement of the asset. Both categories of
above decision involve investments in fixed assets but the basic difference between the two
decisions are in the fact that increasing revenue investment decisions are subject to more
uncertainty as compared to cost reducing investments decisions.
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Further, in view of the investment proposal under consideration, capital budgeting decisions
may be classified as:
Accept Reject Decision:

Accept reject decisions relate independent projects do not compute with one another. Such
decisions are generally taken on the basis of minimum return on investment. All those
proposals which yields a rate of return higher than the minimum required rate of return of
capital are accepted and the rest rejected. If the proposal is accepted the firm makes
investment in it, and the rest are rejected. If the proposal is accepted the firm makes
investment in it, and if it is rejected the firm does not invest in the same.
Mutually Exclusive Project Decision:

Such decisions relate to proposals which compete with one another in such away that
acceptance of one automatically excludes the acceptance of the other. Thus one of the
proposals is selected at the cost of the other. For ex: A company has the option of buying a
machine. Or a second hand machine, or taking on old machine hire or selecting a machine
out of more than one brand available in the market. In such a cases the company can select
one best alternative out of the various options by adopting some suitable technique or
method of capital budgeting. Once the alternative is selected the others. are automatically
rejected.
Capital Rationing Decision:

A firm may have several profitable investment proposals but only limited funds and,
thus, the firm has to rate them. The firm selects the combination of proposals that will yield
the greatest profitability by ranking them in descending order of there profitability.
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METHODS OF CAPITAL BUDGETING AND EVALUATION

TECHNIQUES
Traditional Methods:
i)
Average Rate of Return.
ii)
Pay-Back Period Method
Time Adjusted Method or Discounted Method:

i)
Net Present Value Method
ii)
Internal Rate of Return
iii)
Net Terminal Value Method
iv)
Profitability Index.
CAPITAL BUDGETING METHODS
TRADITIONAL
DISCOUNTED CAHS FLOW
METHOD
METHOD
PLAY BACK ACCOUNTING RATE

PERIOD
OF RETURN
INTERNAL RATE
OF RETURN
NET PRESENT VALUE
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PROFITABILITY INDEX
TRADITIONAL METHODS
Average Rate of Return:
The average rate of return (ARR) method of evaluating proposed capital expenditure
is also know as the accounting rate of return method. It is based upon accounting
information rather than cash flows. There is no unanimity recording the definition of the
rate of return.
ARR =
Average annual profits after taxes
____
X 100
Average investment over the life of the project

The average profits after taxes are determined by adding up the after-tax profits
expected for each year of the projects life and dividing by the number of the years. In the
case of annuity, the average after tax profits is equal to any years profit.
The average investment is determined by dividing the net investment by two. This
averaging process assumes that the firm is suing straight line depreciation, in which case the
book value of the asset declines at a constant rate from its purchase price to zero at the end
of its depreciable life. This means that, on the average firms will have one-half of their
initial purchase prices in the books. Consequently if the machine has salvage value, then
only the depreciable cost (cost salvage value) of the machine should be divide by two in
ordered to ascertain the average net investment, as the salvage money will be recovered only
at the end of the life of the project.
Therefore an amount equivalent to the salvage value remains tied up in the project
though out its lifetime. Hence no adjustment is required to sum of salvage value to
determine the average investment. Like wise if any additional net working capital is required
in the initial year, which is likely to be released only at the end of the projects life. The full
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amount of working capital should be taking determining relevant investment for the purpose
of calculating ARR. Thus,
Average investment = Net Working Capital + Salvage Value + (initial cost of machine
value)
Accept Reject Value:

With the help of ARR, the financial maker can decide whether to accept or
reject the investment proposal. As an accept reject criterion, the actual ARR would be
compared with a predetermined or a minimum required rate of return or cut off rate. A
project would qualify to be accepted if the actual ARR is higher than the minimum desired
ARR. Other wise, it is liable to be rejected. Alternatively the ranking method can be used to
select or reject proposals under consideration may be arranged in the descending order of
magnitude, starting with the proposals with the highest ARR and ending with the proposal
with the lowest ARR. Obviously projects having higher ARR would be preferred with
projects with lower ARR.
Pay Back Period:

The Pay Back method is the second traditional method of capital budgeting. It is the
simplest and, the most widely employed quantitative method for apprising capital
expenditure decisions. This method answers the question. How many years will it for the
cash benefits to pay the original cost of an investment, normally disregarding salvage
value? Cash benefits represent CFAT ignoring interest payment. Thus the pay back method
measures the number of years required for the CFAT to pay back the original out lay
required in an investment proposal.
There are two ways of calculating the pay back period. The first method can be
applied when the cash flow stream is in the nature if annuity for each year of the projects life
that is CFAT is uniform. In such a situation the initial cost of the investment is divided by the
constant annual cash flow;
Investment
Constant Annual Cash Flow
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For example, an investment of Rs. 40,000 in a machine is expected to produce CFAT

of Rs 8,000 for 10 years.
Rs. 40,000
Rs. 8,000
PB = ---------------- 5 years.
The second method is used when project cash flows are not uniform (mixed stream)
but vary form year to year. In such a situation, PB is calculated by the process of cumulating
cash flows till the time when cumulative cash flow become equal to the original investment
outlay.
Accept Reject Criteria:

The pay back period can be use as a decision criterion to accept or reject investment
proposals. One application of this technique is to compare the actual pay back with a
predetermined pay back that is the pay back set up by the management in terms of the
maximum period during which the initial investment will be recovered. If the actual pay
back period less than the predetermined pay back, the project would be accepted. If not, it
would be rejected. Alternatively, the pay back can be used as a ranking method.
When mutually exclusive projects are under consideration, then may be ranked according
length of pay back period. Thus, the project has having the shortest pay back may be
assigned rank one followed in that order so that the project with the longest pay back would
be ranked last. Obviously, projects with shorter payback period will be selected.
DISCOUNTED CASH FLOW/ TIME ADJESTED TECHNIQUES:

Net Present Value Method:
The net present value is a modern method of evaluating investment proposals. This method
takes into consideration the time value of money and attempts to calculate the return on
investments by introducing the factor of time element. It recognizes the fact that rupee
earned today is worth more than the same rupee earned tomorrow. Net present values of all
inflows and outflows of cash occurring during the life of the project is determined separately
for each year by discounting these flows by the firms cost of capital or a pre determined
rate. The following are the Net Present value method of evaluating investment proposals:
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1) First of all determined an appropriate rate of interest that should be selected as minimum
required rate of return called cut off rate of interest in the market and the market- on
long term loans or it should reflect the opportunity cost of capital of the investor.
2) Compute the present value of total investment outlay, I,e., cash outflows at the determined
discount rate. If the total investment is to be made in the initial year, the present value shall
be as the cost of investment.
3) Compute the present value of total investment proceeds I,e., inflows (profit before
depreciation and after tax) at the above determined discount rate.
4) Calculate the Net present value of each project by subtracting the present value of cash
inflows from the value of cash outflows for each project.
5)If the Net present value is positive or zero, I.e., when present value of cash inflows either
exceeds or is equal to the present values of cash outflows, the proposal may be accepted. But
in case the present value of inflows is less than the present value of cash outflows, the
proposal should be rejected.
6) To select between mutually exclusive projects, projects should be ranked in order of net
present values, i.e., the first preferences to be given to the project having the maximum net
present value.
The present value of re.1 due in any number of years may be found with the use of
the following the mathematical formula:
PV= 1/(1+r) n
Where,
PV = present value
R
= rate of interest/ Discount rate
N = number of years
Internal Rate of Return:

The second discounted cash flow or time-adjusted method of appraising capital investment
decisions is the internal rate of return method. This technique is also known as yield on
investment, marginal efficiency of capital, marginal productivity of capital, rate of return
method. This technique is also known a yield on investment,marginal efficiency of capital,
and marginal productivity of capital, rate of return, time-adjusted rate of return and so an.
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Like the present value method the IRR method also considers the time value of money by
case of the net present value method, the discount rate is the required rate of return and
being a predetermined rate, usually the cost of capital, its determinants are external to the
proposal under consideration. The IRR, on the other hand it is based on facts, which are
internal to the proposals. In other words while arriving at the required rate of return for
finding out present values the cash inflows as well as outflows are not considered. But the
IRR depends entirely on the initial outlay and the cash proceeds of the projects, which is
been evaluated of acceptance or rejection. It is therefore appropriately referred to as internal
rate of return.
The internal rate of return is usually the rate of return that a project earns. It is defined as the
discount rate ( r ) which equates the aggregate present value of the Net cash inflows
( CFAT ) with the aggregate present value of cash outflows of a project. In other words it is
that rate which gives the project of Net present value is zero.

The use of the IRR, as a criterion to accept capital investment decisions,
involves a comparison of the actual IRR with the required rate of return also then the cut off
rate or hurdle rate. The project would quality to be accepted if the IRR
(r) Exceeds the cut off rate.
(k). If the IRR and the required rate of return are equal the firm is different as to whether to
accept or reject the project.
Net Terminal Method:

The terminal value approach (TV) even mere distinctly separates the timing of the cash
inflows and outflows. The assumption behind the TV approach is that each cash inflow is
reinvested in other asset at a certain rate of return from the moment it is received until the
termination of the project.

The decision rule is that if the present value of the sum total of the compounded
reinvested cash inflows (PVTS) is greater than the present value of the outflows (PVO), the
proposed project is accepted otherwise not.
PVTS>PVO accept
PVTS<PVO reject.
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The firm would be indifferent if both the values are equal. A variation of the terminal
value method (TV) is the net terminal value (NTV). Symbolically it can be represented as
NTV = (PVTS PVO). If the NTV is the positive accept the project, if the negative reject
the project.
Profitability Index:
The time adjusted capital budgeting is Profitability Index (P1) or Benefit Cost Ratio
(B / C). It is similar to the approach of NPV. The profitability index approach measures the
present value of returns per rupee invested, while the NPV is based on the differences
between the present value of future cash inflows and the present value of cash outflows. A
major shortcoming of the NPV method is that, being an absolute measure; it is not reliable
method to evaluate project inquiring different initial investments. The PI method proves a
solution to this kind of problem. It is, in other words, a relative measure. It may be defined
as the ratio, which is obtained by dividing the present value of future cash inflows by the
present value of cash inflows.
PI
= Present value of cash inflows

Present value of cash outflows
This method is also known as B / C ratio because the numerator measures benefits
and the denominator costs.

Using the B / C ratio or the PI, a project will quality for acceptance if its PI exceeds
one. When PI equals 1 (one), the firm is indifferently to the project.
When PI is greater than, equal to or less than 1 (one), the Net present value is greater
than, equal to or less than zero respectively. In other words, the NPV will be positive when
the PI is greater than 1 (one); will be negative when the PI is less than 1. Thus, the NPV and
PI approach give the same results regarding the investments proposals.
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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
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.
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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
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.
(i)
Mutually exclusive project decision

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

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

The investment decisions of a firm are generally known as the capital
budgeting, or capital expenditure decisions. A capital budgeting decision may be defined as
the firms decision to invest its current funds most efficiently in the long term assets in
anticipation of an expected flow of benefits over a series of years. The long term assets are
those that affect the firms operations beyond the one year period. The firms investment
decisions would generally include expansion, acquisition, modernization and replacement of
the long-term assets.
Sale of a division or business (divestment) is also as an investment decision. Decisions like
the change in the methods of sales distribution, or an advertisement campaign or a research
and development programme have long-term implications for the firms expenditures and
benefits, and therefore, they should also be evaluated as investment decisions. It is important
to note that investment in the long-term assets invariably requires large funds to be tied up in
the current assets such as inventories and receivables. As such, investment in the fixed and
current assets is one single activity.
Features of Investment Decisions:The following are the features of investment decisions:
The exchange of current funds for future benefits.
The funds are invested in long-term assets.
The future benefits will occur to the firm over a series of year.
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Importance of Investment Decisions:Investment decisions require special attention because of the following reasons.
They influence the firms growth in the long run
They affect the risk of the firm
They involve commitment of large amount of funds
They are irreversible, or reversible at substantial loss
They are among the most difficult decisions to make.
Growth
The effects of investment decisions extend in to the future and have to be
endured for a long period than the consequences of the current operating expenditure. A
firms decision to invest in long-term assets has a decisive influence on the rate and direction
of its growth. A wrong decision can prove disastrous for the continued survival of the firm;
unwanted or unprofitable expansion of assets will result in heavy operating costs of the firm.
On the other hand, inadequate investment in assets would make it difficult for the firm to
complete successfully and maintain its market share.
Risk
A long-term commitment of funds may also change the risk complexity of the firm. If the
adoption of an investment increases average gain but causes frequent fluctuations in its
earnings, the firm will become more risky. Thus, investment decisions shape the basic
character of a firm.
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.
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Irreversibility
Most investment decisions are irreversible. It is difficult to find a market for
such capital items once they have been acquired. The firm will incur heavy losses if such
assets are scrapped.
Complexity
Investment decisions are among the firms most difficult decisions. They are
an assessment of future events, which are difficult to predict. It is really a complex problem
to Economic, political, social and technological forces cause the uncertainty in cash flow
estimation.
TYPES OF INVESTEMENT DECISIONS

There are many ways to classify investments. One classification is as follows:
Expansion of existing business
Expansion of new business
Replacement and modernization.
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;
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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.
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, semi-automatic machine, or employ a more
capital-intensive, highly automatic machine for production. Choosing the semiautomatic 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.
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Depending on their profitability and availability of funds, the company can undertake
both investments.
Contingent Investments
Contingent investments are dependent projects; the choice of one investment
necessitates undertaking one or more other investments. For example, if a company
decides to build a factory in a remote, backward area, 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.
It should consider all cash flows to determine the true profitability of the
project.
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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.
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.
Discounted cash flow criteria
Net present value(NPV)
Internal rate return(IRR)
Profitability index(PI)
Non discounted cash flow criteria
Payback period(PB)
Discounted payback period
Accounting rate of return(ARR)
Net Present Value

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

The internal rate of return (IRR) is a Capital budgeting metric used by firms to
decide whether they should make Investments. It is also called discounted cash flow rate of
return (DCFROR) or rate of return (ROR).
It is an indicator of the efficiency or quality of an investment, as opposed to Net present
value (NPV), which indicates value or magnitude.
The IRR is the annualized effective compounded return rate which can be earned on the
invested capital, i.e., the yield on the investment. Put another way, the internal rate of return
for an investment is the discount rate that makes the net present value of the investment's
income stream total to zero.
Another definition of IRR is the interest rate received for an investment consisting of
payments and income that occur at regular periods.
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.
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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
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.
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Relative profitability in the PI method since the present value of cash in flows
is divided by the initial cash out flow , it is a relative measure of projects
profitability.
Like NPV method PI criterion also requires calculation of cash flows and estimate
of the discount rate.
Payback period
The payback period is one of the most popular and widely recognized traditional methods of
evaluating investment proposals. Payback is the number of years required to cover the
original cash outlay invested in a project. If the project generates constant annual cash
inflows, the payback period can be computed by dividing cash outlay by the annual cash
inflow.
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.
Simpl
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.
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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.
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.
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.
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Accounting rate of return

The accounting rate of return (ARR) also known as the return oninvestment
(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:
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
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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
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 costeffective way of fulfilling a given statutory need.
Replacement projects
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Firms routinely invest in equipments means meant to obsolete and inefficient

equipment, even though they may be a serviceable condition. The objective of such
investments is to reduce costs (of labor, raw material and power), increase yield and improve
quality. Replacement projects can be evaluated in a fairly straightforward manner, through at
times the analysis may be quite detailed.
Expansion projects
These investments are meant to increase capacity and/or widen the distribution
network. Such investments call for an expansion projects normally warrant more careful
analysis than replacement projects. Decisions relating to such projects are taken by the top
management.
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 management.
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Capital Budgeting: eight steps
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,
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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.
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.
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.
Identify and consider alternatives
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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.
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.
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
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What rate of ARR is acceptable

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
3. the appraisal method(s) to be used to evaluate proposals
4. the minimum acceptable rate(s) of return on projects of various risk
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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)
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.
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.
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 from
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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.
INDUSTRY PROFILE&COMPANY PROFILE
Automobile industry in India

The automobile industry in India is the ninth largest in the world with an annual production
of over 2.3 million units in 2013 In 2014, India emerged as Asia's fourth largest exporter of
automobiles, behind Japan, South Korea and Thailand.
Following economic liberalization in India in 1991, the Indian automotive industry has
demonstrated sustained growth as a result of increased competitiveness and relaxed
restrictions. Several Indian automobile manufacturers such as Tata Motors, Maruti Suzuki
and Mahindra and Mahindra, expanded their domestic and international operations. India's
robust economic growth led to the further expansion of its domestic automobile market
which attracted significant India-specific investment by multinational automobile
manufacturers. In February 2009, monthly sales of passenger cars in India exceeded 100,000
units.
Bryonic automotive industry emerged in India in the 1940s. Following the independence, in
1947, the Government of India and the private sector launched efforts to create an
automotive component manufacturing industry to supply to the automobile industry.
However, the growth was relatively slow in the 1950s and 1960s due to nationalization and
the license raj which hampered the Indian private sector. After 1970, the automotive industry
started to grow, but the growth was mainly driven by tractors, commercial vehicles and
scooters. Cars were still a major luxury. Japanese manufacturers entered the Indian market
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ultimately leading to the establishment of MarutiUdyog. A number of foreign firms initiated

joint ventures with Indian companies.
In the 1980s, a number of Japanese manufacturers launched joint-ventures for building
motorcycles and light commercial-vehicles. It was at this time that the Indian government
chose Suzuki for its joint-venture to manufacture small cars. Following the economic
liberalization in 1991 and the gradual weakening of the license raj, a number of Indian and
multi-national car companies launched operations. Since then, automotive component and
automobile manufacturing growth has accelerated to meet domestic and export demands.
HISTORY OF THE TWO WHEELERS:

The Britannica Encyclopedia a motorcycle as a bike or tricycle propelled by an internal
combustion engine (or, less often by an electric engine). The automobile was the reply to
the 19th century reams of self-propelling the horse-drawn bikeriage.
Similarly, the
invention of the motorcycle created the self propelling bicycle. The first commercial
design was three-wheeler built by Edward Butler in Great Britain in 1884. This employed a
horizontal single-cylinder gasoline engine mounted between two steer able front wheels and
connected by a drive chain to the rear wheel. The 1900s saw the conversion of many
bicycles or pedal cycles by adding small, centrally mounted spark ignition engine engines.
There was then felt the need for reliable constructions. This led to road trial tests and
competition between manufacturers. Tourist Trophy (TT) races were held on the Isle of
main in 1907 as reliability or endurance races. Such were the proving ground for many new
ideas from early two-stroke-cycle designs to supercharged multivalent engines mounted on
aerodynamic, bikebon fiber reinforced bodywork.
INVENTION OF TWO WHEELERS:

The invention of two wheelers is a much-debated issue.
Who invented the first
motorcycle? May seem like a simple question, safety, bicycle, i.e., bicycle with front
and rear wheels of the same size, with a pedal crank mechanism to drive the rear wheel.
Those bicycles in turn described from high-wheel bicycles. The high wheelers descended
from an early type of pushbike, without pedals, propelled by the riders feet pushing against
the ground. These appeared around 1800, used iron banded wagon wheels, and were called
44
bone-crushers, both for their jarring ride, and their tendency to toss their riders. Gottiieb
Daimler (who credited with the building the first motorcycle in 1885, one wheel in the front
and one in the back, although it had a smaller spring-loaded outrigger wheel on each side. It
was constructed mostly of wood, the wheels were of the iron-banded wooden-spooked
wagon-type and it definitely had a bone-crusher chassis!
FURTHER DEVELOPMENTS:
Most of the developments during the early phase concentrated on three and four-wheeled
design since it was complex enough to get the machines running with out having to worry
about them falling over. The next notable two-wheeler though was the Hildebrand & Wolf
Mueller, patented in Munich in 1894. In 1895, the French firm of DeDion-button built and
engine that was to make the mass production and common use of motorcycle possible. The
first motorcycle with electric start and a fully modem electrical system; the Hence special
from the Indian Motorcycle Company astounded the industry in 1931. Before World War 1,
IMC was the largest motorcycle manufacturer in the world producing over 20000 bikes per
year.
INCREASING POPULARITY:
The popularity of the vehicle grew especially after 1910, in 1916; the Indian motorcycle
company introduced the model H racer, and placed it on sale. During World War 1, all
branches of the armed forces in Europe used motorcycles principally for dispatching. After
the war, it enjoyed a sport vogue until the Great Depression began in motorcycles lasted into
the late 20th century; weight the vehicle beingused for high-speed touring and sport
competitions. The more sophisticated of a 125cc model. Since then, an increasing number
of powerful bikes have blazed the roads.
HISTORICAL INDUSTRY DEVELOPMENTS:

45
Indian is the second largest manufacturer and producer to two wheelers in the World. It
stands next only to Japan and China in terms of the number of V produced and domestic
sales respectively. This destination was achieved due to variety of reason like restrictive
policy followed by the government of India towards the passenger bike industry, rising
demand for personal transport, inefficiency in the public transportation system etc. The
Indian two-wheelers industry made a small beginning in the early 50s when Automobile
products of India (API) started manufacturing scooters in the country. Until 1958, API and
Enfield were the sole producers.
The two wheelers market was opened were opened to foreign competition in the mid-80s.
And the then market leaders-Escorts and Enfield were caught unaware by the onslaught of
the 100cc bikes of the four Indo- Japanese joint ventures. With the availability of fuelefficiency low power bikes, demand swelled, resulting in Hero Honda then the only
producer of four stroke bikes (100cc category), gaining a top slot.
The first Japanese motorcycles were introduced in the early eighties. TVS Suzuki and Hero
Honda brought in the first two-stroke and four-stroke engine motorcycles respectively.
These two players initially started with assembly of CKD Kits, and later on progressed to
indigenous manufacturing.
The industry had a smooth ride in the 50s, 60s and 70s when government prohibited new
entries and strictly controlled capacity expansion. The industry saw a sudden growth in the
80s. The industry witnessed a steady of 14% leading to a peak volume of 1.9 mn vehicles in
1990.
In 1990 the entire automobile industry saw a drastic fall in demand. This resulted in a
decline of 15% in 1991 and 8% in 1992, resulting in a production loss of 0.4mn vehicles.
Barring Hero Honda, all the major producers suffered from recession in FY93 and FY94.
Hero Honda showed a marginal decline in 1992.
The reason for recession in the sector were the incessant rise in fuel prices, high input costs
and reduced purchasing power due to significant like increased production in 1992, due to
new entrants coupled with recession in the industry resulted in companies either reporting
losses or a fall in profits.
CONCLUSION:
46
The two-wheelers market has hada perceptible shift from a buyers market to a sellers
market with a variety of choice, players will have compete on various fronts viz. pricing,
technology product design, productivity after sale service, marketing and distribution. In the
short term, market shares of individual manufacturers are going to be sensitive to capacity,
product acceptance, pricing and competitive pressures from other manufacturers.
As incomes grow and people grow and people feel the need to own a private means of
transport, sales of two-wheelers will rise.
Penetration is expected to increase to
approximately to more than 25% by 2005.

The motorcycle segment will continue to lead the demand for two-wheelers in the coming
years. Motorcycle sale is expected to increase by 20% yoy as compared to 1% growth in the
scooter market and 3% by moped sales respectively for the next two years.
The four-stroke scooters will add new dimension to the two-wheeler segment in the coming
future.
The Asian continent is that largest user of the two-wheelers in the world. This is due to poor
road infrastructure and low per capita income, restrictive policy on bike industry. This is
due to oligopoly between top five players in the segment, compared to thirsty manufacturers
in the bike industry.
Hero Honda motors LTd., is one of the leading companies in the two-wheeler industry. At
present it is the market leader in the motorcycle segment with around 47% the market share
during FY 2000 01. During the year, company posted a 41.15% yoy rise in turnover to
Rs.31, 686.5mn in motorcycles which driven by a 35.17% yoy rise in Motorcycle sales
volumes. The company has emerged as one of the most successful players, much ahead of its
competitions an account of its superior and reliable product quality complemented with
excellent marketing techniques. The company has been consistently addressing the growing
demand for motorcycles and has been cumulative customer base of over 4 million
customers, which is expected to reach 5min mark with rural and semi-urban segment being
the new class of consumers.
47
COMPANY PROFILE
CORPORATE PROFILE
Hero Moto Corp Ltd. (Formerly Hero Honda Motors Ltd.) is the world's largest
manufacturer of two - wheelers, based in India.
In 2001, the company achieved the coveted position of being the largest two-wheeler
manufacturing company in India and also, the 'World No.1' two-wheeler company in terms
of unit volume sales in a calendar year. Hero MotoCorp Ltd. continues to maintain this
position till date.
Today, every second motorcycle sold in the country is a Hero Honda bike. Every 30 seconds,
someone in India buys Hero Honda's top-selling motorcycle Splendor.
Vision
The Hero Honda story began with a simple vision the vision of a mobile and an
empowered India, powered by Hero Honda. This vision was driven by Hero Hondas
commitment to customer, quality and excellence, and while doing so, maintaining the
highest standards of ethics and societal responsibilities. Hero Honda believes that the fastest
way to turn that dream into a reality is by remaining focused on that vision.
Strategy
Hero Hondas key strategy has been driven by innovation in every sphere of activity
building a robust product portfolio across categories, exploring new markets, aggressively
48
expanding the network and continuing to invest in brand building activities.
Manufacturing
Hero Honda bikes are manufactured across three globally benchmarked manufacturing
facilities. Two of these are based at Gurgaon and Dharuhera which are located in the state of
Haryana in northern India. The third and the latest manufacturing plant is based at Haridwar,
in the hill state of Uttrakhand.
Technology
In the 1980s Hero Honda pioneered the introduction of fuel-efficient, environment friendly
four-stroke motorcycles in the country. Today, Hero Honda continues to be technology
pioneer. It became the first company to launch the Fuel Injection (FI) technology in Indian
motorcycles, with the launch of the Glamour FI in June 2006.
Products
Hero Honda's product range includes variety of motorcycles that have set the industry
standards across all the market segments. The company also started manufacturing scooter in
2006. Hero Honda offers large no. of products and caters to wide variety of requirements
across all the segments.
Distribution
The company's growth in the two wheeler market in India is the result of an intrinsic ability
to increase reach in new geographies and growth markets. Hero Honda's extensive sales and
service network now spans close to 4500 customer touch points. These comprise a mix of
authorized dealerships, Service & Spare Parts outlets, and dealer-appointed outlets across the
country.
Brand
The company has been continuously investing in brand building utilizing not only the new
product launch and new campaign launch opportunities but also through innovative
marketing initiatives revolving around cricket, entertainment and ground- level activation.
49
Hero Honda has been actively promoting various sports such as hockey, cricket and golf.
Hero Honda was the title sponsor of the Hero Honda FIH Hockey World Cup that was
played in Delhi during Feb-March 2010. Hero Honda also partners the Commonwealth
Games Delhi 2010.
2015-16 Performance
Total unit sales of 54,02,444 two-wheelers, growth of 17.44 per cent
Total net operating income of Rs. 19401.15 Crores, growth of 22.32 per cent
Net profit after tax at Rs. 1927.90 Crores
Total dividend of 5250% or Rs. 105 per share including Interin Dividend of Rs. 70 per share
on face value of each share of Rs. 2 each
EBIDTA margin for the year 13.49 per cent
EPS of Rs. 96.54
2014-15 Performance
Total unit sales of 46,00,130 two-wheelers, growth of 23.6 per cent
Total net operating income of Rs. 15860.51 Crores, growth of 28.1 per cent
Net profit after tax at Rs. 2231.83 Crores, growth of 74.1 per cent
Final dividend of 1500% or Rs. 30 per share on face value of each share of Rs. 2
EBIDTA margin for the year 17.4 per cent
EPS of Rs. 111.77, growth of 74.1 per cent
HERO HONDA'S MISSION

Hero Hondas mission is to strive for synergy between technology, systems and human
resources, to produce products and services that meet the quality, performance and price
aspirations of its customers. At the same time maintain the highest standards of ethics and
social
responsibilities.
50
This mission is what drives Hero Honda to new heights in excellence and helps the
organization forge a unique and mutually beneficial relationship with all its stake holders.
HERO HONDA'S MANDATE

Hero Honda is a world leader because of its excellent manpower, proven management,
extensive dealer network, efficient supply chain and world-class products with cutting edge
technology from Honda Motor Company, Japan. The teamwork and commitment are
manifested in the highest level of customer satisfaction, and this goes a long way towards
reinforcing its leadership status
BOARD OF DIRECTORS
No.
Name of the Directors
Designation
Mr. PawanMunjall
Chairman & Whole-time Director
Mr. Toshiaki Nakagawa
Joint Managing Director
Mr. Sumihisa Fukuda
Technical Director
Mr. Sunil Kant Munjal
Non-Executive Director
Mr. Suman Kant Munjal
Mr. Takashi Nagai
Mr. Yuji Shiga
Mr. PradeepDinodia
Non-executive & Independent Director
Gen. (Retd.) V. P. Malik
10
Mr. Analjit Singh
11
Dr. Pritam Singh
12
Ms. ShobhanaBhartia
13.
Mr. M. Damodaran
14.
Mr. Ravi Nath
15.
Dr. Anand C. Burman
51
BRIEF PROFILE OF DIRECTORS

Mr. Munjal is the Chairman, Managing Director & CEO of the Company. He is responsible
for growth and strategic planning for the entire Group. A graduate in Mechanical
Engineering, Mr. Munjal has been instrumental in bringing about technological and
managerial excellence in the Company's operations. He has been the Chairman of several
Committees of CII.
He is also on the board of Indian Institute of Management, Lucknow and Indian School of
Business. An avid golfer, Mr. Munjal is Past Chairman of the Asian PGA Tour Board of
Directors and the Past President of Professional Golfers Association of India (PGAI). Under
his guidance, Hero MotoCorp launched the Hero Indian Sports Academy (HISA) in
collaboration with Laureus Foundation to provide equal opportunities in sports to various
communities and to reward talent in the country.
52
Mr. Suman
Kant Munjal
Non Executive Director
Mr. Munjal was appointed as an Additional Director on the Board of the Company on July
29, 2010. Mr. Munjal is the Managing Director of Rockman Industries Ltd., one of the
leading suppliers of Aluminum Die Casting, Machined and Painted Assemblies to Hero
MotoCorp Ltd. Mr. Munjal, a graduate in Commerce, possesses rich experience and
expertise in business management and thus has been instrumental in elevating Rockman
Industries Ltd. to its current status.
No. Name of Company
Nature of Office
Hero Honda Motors Limited
Chairman and Whole-time Director
Hero Honda Finlease Limited
Chairman and Director
Munjal Showa Limited
Chairman and Director
Easy Bill Limited
Director
Rockman Industries Limited
Director
ShivamAutotech Limited
Director
53
KEY MILESTONES OF HERO HONDA

Year
Event
1983 Joint Collaboration Agreement with Honda Motor Co. Ltd. Japan signed
Shareholders Agreement signed
1984
Hero Honda Motors Ltd. incorporated
1985 First motorcycle "CD 100" rolled out
1987 100,000th motorcycle produced
1989 New motorcycle model - "Sleek" introduced
1991 New motorcycle model - "CD 100 SS" introduced
500,000th motorcycle produced
1992 Raman MunjalVidyaMandir inaugurated - A School in the memory of founder
Managing Director, Mr. Raman Kant Munjal
1994 New motorcycle model - "Splendor" introduced
1,000,000th motorcycle produced
1997 New motorcycle model - "Street" introduced
Hero Honda's 2nd manufacturing plant at Gurgaon inaugurated
1998 2,000,000th motorcycle produced
1999 New motorcycle model - "CBZ" introduced
Environment Management System of Dharuhera Plant certified with ISO-14001 by
DNV Holland
Raman Munjal Memorial Hospital inaugurated - A Hospital in the memory of
founder Managing Director, Mr. Raman Kant Munjal
2000 4,000,000th motorcycle produced
Environment Management System of Gurgaon Plant certified ISO-14001 by DNV
Holland
Splendor declared 'World No. 1' - largest selling single two-wheeler model
"Hero Honda Passport Programme" - CRM Programme launched
2001 New motorcycle model - "Passion" introduced
One million production in one single year
New motorcycle model - "Joy" introduced
5,000,000th motorcycle produced
2002 New motorcycle model - "Dawn" introduced
New motorcycle model - "Ambition" introduced
54
Appointed VirenderSehwag, Mohammad Kaif, Yuvraj Singh, Harbhajan Singh and

Zaheer Khan as Brand Ambassadors
2003 Becomes the first Indian Company to cross the cumulative 7 million sales mark
Splendor has emerged as the World's largest selling model for the third calendar year
in a row (2000, 2001, 2002)
New motorcycle model - "CD Dawn" introduced
New motorcycle model - "Splendor +" introduced
New motorcycle model - "Passion Plus" introduced
New motorcycle model - "Karizma" introduced
2004 New motorcycle model - "Ambition 135" introduced
Hero Honda became the World No. 1 Company for the third consecutive year.
Crossed sales of over 2 million units in a single year, a global record.
Splendor - World's largest selling motorcycle crossed the 5 million mark
New motorcycle model - "CBZ*" introduced
Joint Technical Agreement renewed
Total sales crossed a record of 10 million motorcycles
2005 Hero Honda is the World No. 1 for the 4th year in a row
New motorcycle model - "Super Splendor" introduced
New motorcycle model - "CD Deluxe" introduced
New motorcycle model - "Glamour" introduced
New motorcycle model - "Achiever" introduced
First Scooter model from Hero Honda - "Pleasure" introduced
15 million production milestone achieved
New 'Splendor NXG' launched
New 'CD Deluxe' launched
New 'Passion Plus' launched
New motorcycle model 'Hunk' launched
55
2008 Hero Honda Haridwar Plant inauguration

New 'Pleasure' launched
Splendor NXG lauched with power start feature
New motorcycle model 'Passion Pro' launched
New 'CBZ Xtreme' launched
CD Deluxe lauched with power start feature
New 'Glamour' launched
2009
Hunk' (Limited Edition) launched
Splendor completed 11 million production landmark
2010
New motorcycle model 'Karizma - ZMR' launched

Silver jubilee celebrations
2011
New model Splendor Pro launched

Launch of new Super Splendor and New Hunk
New licensing arrangement signed between Hero and Honda
Launch of new refreshed versions of Glamour, Glamour FI, CBZ Xtreme, Karizma
2012
Crosses the landmark figure of 5 million cumulative sales in a single year

Migration of all products to Brand Hero, Strategic partnership with Erik Buell
2013
Racing (EBR) of USA, Launch of Impulse, Maestro and Ignitor

Neemrana Plant Foundation Stone laid, Global Parts Centre Foundation
2014
Stone laid
50 Million cumulative 2 wheelers production
2015
Neemrana Plant Inauguration, Global Parts Centre Inauguration

60 Million cumulative 2 wheelers production
PROMINENT AWARDS TO THE COMPANY

Year Awards & Recognitions
2011
Two-wheeler Manufacturer of the Year award by Bike India magazine.

Adjudged the "Bike Manufacturer of the Year" at the Economic Times ZigWheels Car
and Bike Awards.
- CNBC Awaaz - Storyboard special commendation for "Effective rebranding of a
56
new corporate entity" by CNBC Awaaz Consumer Awards

- "Most Recommended Two-Wheeler Brand of the Year" award by CNBC Awaaz
Consumer Awards
- Colloquy Loyalty Awards "Innovation in Loyalty Marketing International 2011"
for Hero GoodLife
- "Best Activity Generating Short or Long-Term Brand Loyalty" by the Promotion
Marketing Award of Asia Order of Merit for Hero GoodLife
- Ranked No 1 brand in the Auto (Two-Wheelers) category in the Brand Equity
201
"Most Trusted Brand" 2011 survey
0
Company of the Year awarded by Economic Times Awards for Corporate Excellence
2008-09.
CNBC TV18 Overdrive Awards 2010 'Hall of Fame' to Splendor
NDTV Profit Car & Bike Awards 2010
Two-wheeler Manufacturer of the Year
CnB Viewers' Choice Two-wheeler of the Year (Karizma ZMR)
Bike Maker of the Year by ET-ZigWheels Car & Bike of the Year Awards 2009
200 'Two-wheeler Manufacturer of the Year' by NDTV Profit Car & Bike Awards 2009
9
and Passion Pro adjudged as CNB Viewers' Choice two-wheeler

Top Indian Company under the 'Automobile - Two-wheelers' sector by the Dun &
Bradstreet-Rolta Corporate Awards
Won Gold in the Reader's Digest Trusted Brand 2009 in the 'Motorcycles' category
NDTV Profit Business Leadership Awards 2009 - two-wheeler category
57
200 NDTV Profit Business Leadership Award 2008 - Hero Honda Wins the Coveted
8
"NDTV Profit Business Leadership Award 2008"

TopGear Design Awards 2008 - Hunk Bike of the Year Award
NDTV Profit Car India & Bike India Awards - NDTV Viewers Choice Award to
Hunk in Bike category
IndiaTimes Mindscape and Savile Row ( A Forbes Group Venture ) Loyalty Awards Customer and Brand Loyalty Award in Automobile (two-wheeler) sector
Asian Retail Congress Award for Retail Excellence (Strategies and Solutions of
business innovation and transformation) - Best Customer Loyalty Program in
Automobile category
NDTV Profit Car India & Bike India Awards - Bike Manufacturer of the year
Overdrive Magazine - Bike Manufacturer of the year
TNS Voice of the Customer Awards:
No.1 executive motorcycle Splendor NXG
No.1 standard motorcycle CD Deluxe
No. premium motorcycle CBZ Xtreme
200 The NDTV Profit Car India & Bike India Awards 2007 in the following category:
7
Overall "Bike of the Year" - CBZ X-treme
"Bike of the Year" - CBZ X-treme (up to 150 cc category)
"Bike Technology of the Year" - Glamout PGM FI
"Auto Tech of the Year" - Glamout PGM FI by Overdrive Magazine.

"Bike of the Year" - CBZ X-treme by Overdrive Magazine.
Ranked CBZ X-treme "Bike of the Year" - by B S Motoring Magazine
Most Trusted Company , by TNS Voice of the Customer Awards 2006.
CD Deluxe rated as "No 1 standard motorcycle" by TNS Voice of the Customer
Awards 2006.
200 Adjudged 7th Top Indian Company by Wallstreet Journal Asia (Top Indian Two
6
Wheeler Company).
One of the 8 Indian companies to enter the Forbes top 200 list of worlds most
58
reputed companies.
No. 1 in automobile industry by TNS Corporate Social Responsibility Award.
Best in its class awards for each category by TNS Total Customer Satisfaction
Awards 2006:
Splendor Plus (Executive)
CD Deluxe (Entry)
201
'Two-wheeler Manufacturer of the Year' by NDTV Profit Car & Bike
Awards 2009 and Passion Pro adjudged as Car and Bike Viewers'
Choice two-wheeler
Rated as Top Indian Company in Automobile - Two Wheelers sector
2011
by Dun & Bradstreet - Rolta Corporate Awards 2009

201
Business Leader in Automobiles (two-wheelers) at the NDTV Profit
Business Leadership Awards 2012 (Conferred upon Mr. Pawan

Munjal)
201
Green Pioneer Award 2013
3
Motorbeam - Bike Manufacturer of the year, Zigwheels - Entry-Level
201
Bike of the year: Hero Splendor iSmart
4
Overdrive - Scooter of the Year - Hero Maestro Edge,
201 .
6
Overdrive - 'Viewers' Choice Scooter of the Year - Hero Maestro Edge
The NDTV Profit Car India & Bike India Awards 2006 in the following category:
Bike Maker of the Year
Bike of the Year - Achiever
Bike of the Year - Achiever (up to 150 cc category)
Bike of the Year - Glamour (up to 125 cc category)

59
NDTV Viewers' Choice Award to Glamour in the bike category
CORPORATE SOCIAL RESPONSIBILITY (CSR)

STAKEHOLDER TIES AT THE GRASSROOTS
Hero Honda Motors takes considerable pride in its stakeholder relationships, especially ones
developed at the grassroots. The Company believes it has managed to bring an economically
and socially backward region in Dharuhera, Haryana, into the national economic
mainstream.
An Integrated Rural Development Centre has been set up on 40 acres of land along the
Delhi-Jaipur Highway. The Centre-complete with wide approach roads, clean water, and
education facilities for both adults and children-now nurtures a vibrant, educated and healthy
community.
The Foundation has adopted various villages located within vicinity of the Hero Honda
factory at Dharuhera for integrated rural development. This includes:
Installation of deep bore hand pumps to provide clean drinking water.
Constructing metalled roads and connecting these villages to the National Highway
(NH -8).
Renovating primary school buildings and providing hygienic water and toilet
facilities.
Ensuring a proper drainage system at each of these villages to prevent water-logging.
Promoting non-conventional sources of energy by providing a 50 per cent subsidy on

biogas plants.
60
The Raman MunjalVidyaMandirbegan with three classes (up to class II) and 55 students
from nearby areas. It has now grown into a modern Senior Secondary, CBSE affiliated coeducational school with over 1200 students and 61 teachers. The school has a spacious
playground, an ultra-modern laboratory, a well-equipped audio visual room, an activity
room, a well-stocked library and a computer centre.
The Raman Munjal Sports Complex has basketball courts, volleyball courts, and hockey and
football grounds are used by the local villagers. In the near future, sports academies are
planned for volley ball and basket ball, in collaboration with National Sports Authority of
India.
Vocational Training Centre

In order to help local rural people, especially women, Hero Honda has set up a Vocational
Training Centre. So far 26 batches comprising of nearly 625 women have been trained in
tailoring, embroidery and knitting. The Company has helped women trained at this centre to
set up a production unit to stitch uniforms for Hero Honda employees. Interestingly, most of
the women are now self-employed.
Adult Literacy Mission

This Scheme was launched on 21st September, 1999, covering the nearby villages of
Malpura, Kapriwas and Sidhrawali. The project started with a modest enrolment of 36
adults. Hero Honda is now in the process of imparting Adult Literacy Capsules to another
100 adults by getting village heads and other prominent villagers to motivate illiterate adults.
Marriages of underprivileged girls

Marriages are organized from time to time, particularly for girls from backward classes, by
the Foundation by providing financial help and other support to the families.
Rural Health Care

Besides setting up a modern hospital, the Foundation also regularly provides doorstep health
care services to the local community. Free health care and medical camps are now a regular
feature in the Hero Group's community outreach program
KEY POLICIES
AN ENVIRONMENTALLY AND SOCIALLY, AWARE
COMPANY
61
At Hero Honda, our goal is not only to sell you a bike, but also to help you every step of the
way in making your world a better place to live in. Besides its will to provide a high-quality
service to all of its customers, Hero Honda takes a stand as a socially responsible enterprise
respectful of its environment and respectful of the important issues.
Hero Honda has been strongly committed not only to environmental conservation
programmers but also expresses the increasingly inseparable balance between the economic
concerns and the environmental and social issues faced by a business. A business must not
grow at the expense of mankind and man's future but rather must serve mankind.
"We must do something for the community from whose land we generate our wealth."
A famous quote from our Worthy Chairman Mr.BrijmohanLallMunjal.
Environment Policy
We at Hero Honda are committed to demonstrate excellence in our environmental
performance on a continual basis, as an intrinsic element of our corporate philosophy.
To achieve this we commit ourselves to:
Integrate environmental attributes and cleaner production in all our business

processes and practices with specific consideration to substitution of hazardous
chemicals, where viable and strengthen the greening of supply chain.
Continue product innovations to improve environmental compatibility.
Comply with all applicable environmental legislation and also controlling our
environmental discharges through the principles of "alara" (as low as reasonably
achievable).
Institutionalise resource conservation, in particular, in the areas of oil, water,

electrical energy, paints and chemicals.
Enhance environmental awareness of our employees and dealers / vendors, while

promoting their involvement in ensuring sound environmental management.
Quality Policy
62
Excellence in quality is the core value of Hero Honda's philosophy.

We are committed at all levels to achieve high quality in whatever we do, particularly in our
products and services which will meet and exceed customer's growing aspirations through:
Innovation in products, processes and services.
Continuous improvement in our total quality management systems.
Teamwork and responsibility.
Safety Policy
Hero Honda is committed to safety and health of its employees and other persons who may
be affected by its operations. We believe that the safe work practices lead to better business
performance, motivated workforce and higher productivity.
We shall create a safety culture in the organization by:
Integrating safety and health matters in all our activities.
Ensuring compliance with all applicable legislative requirements.
Empowering employees to ensure safety in their respective work places.
Promoting safety and health awareness amongst employees, suppliers and

contractors.
Continuous improvements in safety performance through precautions besides

participation and training of employees.
INTRODUCTION ABOUT PHOENIX DEALER PROFILE (PHOENIX

MOTORS)
PHOENIX MOTORS PVT LTD is dealership type of business. PHOENIX MOTORS PVT
LTD. is established on 21st march 2003. The business is running by only one man. The
owner name is ch .madhumathi the firm is located at habsiguda in Hyderabad.
63
Generally the sale will be either on cash basis or on institutional basis. Bank like ICICI,
HDFC and CENTURION are providing loans to customers.
Advertising strategy of phoenix motors:
They are giving the ads through newspapers, wall paintings, hoardings and field staff. They
are upgrading sales by introducing the schemes, group bookings, institutional sales and
customer door-to-door activities.
Categorization of Staff members:

Staff members are categorized for technicians, 25 members are allotted for field staff, 5
members are recruited for sales for persons, 5 persons are placed for evaluating for spare
parts, 5 members are allotted for managerial accounts and another 3 persons for cash
transaction and other members are allotted for remaining work.
Customer relationship:
They entertain the showroom providing a customers huge having pool game, internet
facility and television with home there system. They provide bile maintenance programs on
every week.
According to other dealers PHOENIX motors in first in sales and best in service. They treat
customer, is the very important person at PHOENIX motors customer satisfaction is their
motto, why because, they will satisfied customer is the best advertisement. They provide
better value for the customers and as well as employees also. At PHOENIX motors the
customer is the boss.
SALES STRATEGY OF PHOENIX MOTORS:

Average they are selling 25 vehicles per day. PHOENIX motors PVT L.T.D is the A.P s
NO.1 dealership in sales and other activities? It is a QLAD (qualify leader through quality
dealer). At PHOENIX motor they gave the quality service to the customers why because the
cost is long forgotten but the quality is remembered for ever. They treat quality has a...
64
Quest for excellence
Understanding customers needs
Action to achieve customers appreciation.
Leadership determined to be a leader
involving all the people
Team spirit to work for a common goal
Yard sticks to measure programs.
WARRANTY ON PROPRIETARY ITEMS:

Warranty on proprietary items like Tyros, Tubes and Battery etc, will be directly handled by
the respective original manufactures (OEMs) except AMCO for batteries and Dunlop and
Falcon tires and Tubes. In case of any defect in proprietary items, other than the above two
mentioned OEMS the dealers must approach the Brach office dealer of the respective
manufacture. For AMCO batteries and Dunlop and falcon tires, tubes claims will be
accepted at our authorized dealerships per the mutually agreed terms and conditions between
HERO HONDA and of these two OEMs in case the claim is not accepted for invalid
reasons. Then the claim along with the refusal note form the OEM can be sent to the
warranty section at gorgon plan after due to recommendation of the area service engineer. If
any other six services or subsequent paid services is not availed as per the recommended
schedule given in the owners manual. If HERO HONDA recommended engine oil is not
used. To normal wear & tear components like bulbs, electric wiring, filters, spark plug,
clutch plates, braded shoes, fasteners, shim washers, oil seals, gaskets, rubber parts (other
than tyre and tube) plastic components, chain$ sprockets and in case of wheel
rim
misalignment or bend.
65
If there is any damage due o modification or fittings of accessories other than ones
recommended by HERO HONDA. If the motor has been used in any competitive events like
tracking races or rallies. If there is any damage to the painted surface due to industrial
pollution or other extraneous factors. For clams made for any consequential damage due to
any previous malfunction. For normal phenomenon like noise, vibration, oil seepage, which
do not affect the performance of the motorcycles.
SOCIAL SERVICE ACTIVITIES

PHOENIX motors participate and conduct social service activities. Recently the phoenix
motors organized a BLOOD DONATION CAMP for the trust on 21 st January 2006.they
motivated on the consumers to participated in this camp and also provide certificate for the
customer
THE MARKETED LATEST BIKES OF PHOENIX (All Hero Moto Corp.)
66
KARIZMA
IMPULSE
67
MAESTRO EDGE
SPLENDOR PRO CLASSIC
68
XTREME SPORTS
IGNITOR
69
CUSTOMER RELATIONSHIP:
To entertain the customers the showroom providing a customers huge having pool game,
Internet facility and television with home theatre system. They provide bike maintenance
programs on every week. According to other dealers PHOENIX motors in first in sales and
best in service. They treat customer, is the very important person at PHOENIX motors
customer satisfaction is their motto, why because, the well satisfied customer is the best
advertisement. They provide better value for the customers and as well as employees also.
At PHONIX motors the customer is the boss.
70
DATA ANALYSES AND INTERPRETATION

FINACIAL ANALYSIS
ANALYSIS OF HERO MOTO CORP LTD
TABLE:1
Total
Total
Fixed
Net
Capital
sales
assets
assets
Profit
Employed
2011-
3002.7
2074.2
2012
2012-
1
3897.9
7
3300.5
865.6
1719.8
2013
2013-
8
4750.6
2
4666.4
2
2461.8
2014
2014-
2
5397.8
5
5299.5
6
3041.3
2015
2015-
8
5918.2
2
5020.3
9
2126.8
2016
Years
383.35
378.74
237.34
-210.21
-379.74
1173.21
2289.36
3232.23
4145.56
2812.99
Long
Share
term
holders
funds
Funds
1,13,161
45.45
1,27,090
1,49,415
1,66,719
2,14,254
45.45
45.45
45.45
45.45
TABLE 2
Years
Investment Turn Over

Ratio
Ratio
2011-2012
2012-2013
2013-2014
2014-2015
2015-2016
1.447598
1.18102
1.018037
1.01856
1.178842
Change
0.266578
0.162983
-0.00052
-0.16028
Investment Turn Over Ratio

Formula:
Investment Turn Over Ratio = Total Sales/Total Assets
71
The effective use of investment is an index of corporate efficiency. Determining the

size and mix of total assets with depend on the nature of the undertaking, scale of operations,
and the resources available. The available assets should be used to generate maximum
productivity. Increasing investment turn over would indicate the efficient use of assets and a
positive contribution to the ROI. The trends in investment turnover of Hero Moto Corp Ltd
Presented in table-I reveal the following.
a) The amount of total investment in assets as increased significantly from 4783.65 cr
to Rs.6636.57 cr. This increase in the total assets is an account of the following
reasons.
1) Increasing new projects and capital working progresses.
2) Increase in size of current Assets.
3) Increased operations and expansion of existing Units.
b) The amount of sales has increased from 3002.71 Cr to 5918.20 Cr (2014-2015) this
increased sales helped the organization to improve its business turn over in different
sectors. The increase in sales is higher than increases in investment in fixed assets.
c) In view of the above the (total assets turnover ratio of Hero Moto Corp Ltd recorded
consistent fluctuation ranging 0.26 (2011-2012) the lowest ratio recorded as 0.005
(2012-2013). This decline is an account of lower growth rate sales in those years.
72
TABLE - 3
Years
Fixed Assets Turn

Ratio
2011-2012
2012-2013
2013-2014
2014-2015
2015-2016
Over Ratio
Change
3.468935
2.266505
1.20243
1.929687
0.336817
1.774807
0.15488
2.7826
-1.00779
Fixed Assets Turn Over Ratio:

Formula:
Fixed Assets Turn Over Ratio = Sales/Fixed Assets
The installed capacity of the fixed resources has significantly bearing on the
corporate plans of expansion and growth. At the same time fixed assets should be utilized
optimally to reduce the burden of overheads. On the production and sales. Similarly idle
capacity is regarded as an index of the companys inability in utilizing the fixed resources.
The use of fixed assets will depend on different factors like market potential for its existing
products, new plans for growth and expansion, availability of other working resources like
raw material, power suppliers etc. increased fixed assets turnover would reduce the fixed
costs burden and accelerates the productivity to the investment in fixed assets. An analysis
of fixed assets turnover in Hero Moto Corp Ltd
presented in table reveals the following.
a) The amount of investment in fixed assets has increased form Rs.865.62 Cr to

Rs.2126.86 Cr. Thus in a period of 5 years fixed assets have increased by early 42.58
%.
b) During the same period I,e., sales have also increased significantly from Rs.3002.71
Cr to Rs.5918.20 Cr. It appears that the company has utilized the fixed assets
effectively.
73
c) The fixed assets turnover ratio has showing a fluctuating trend and increase from
1.04 times to -1.01 times (2014-2015). This fluctuation any be due to fixed assets
investment.
TABLE - 4
Years
2011-2012
2012-2013
2013-2014
2014-2015
2015-2016
Return on Investment
Ratio%
Change%
0.326753
0.165435
0.161318
0.073429
0.092006
-0.05071
0.124136
-0.135
0.084288
Return on Investment.
Formula:
Return on Investment =
Net Profit
_____________________ X 100
Capital Employed
Return on investment is an overall measure of business efficiently. ROI is calculated

as a percent of net profit to total investment. Functionally it is 9 product of profit margin and
investment turnover. It is proposed to examine the trends in ROI of Hero Moto Corp Ltd.
This will provide a general idea on the awards profitability of the concern.
a) The amount of total investment increased from Rs.6636.58 Cr to Rs.4783.67 Cr over

a period of 5 years.
b) During the same period profit before tax has decreased form Rs.552.54 to Rs.-708.95
Cr.
From the above, it is observed that the decreased in profit is not proportionate with
the increase in investment.
74
TABLE 5
Years
2011-2012
2012-2013
2013-2014
2014-2015
2015-2016
Fixed Assets Ratio

Ratio
Change
0.764928
1.35323
-0.5883
1.647666
-0.29444
1.824261
-0.1766
0.992682
0.83158
Fixed Assets Ratio.

Formula:
Fixed Assets Ratio = Fixed Assets / Total Long Term Funds.
Fixed assets to total long-term funds, this ratio indicates the proportion fixed assets
that financed by long-term funds. In other words it indicates the amount of external
borrowings invested in fixed assets. Generally more of external funds used for investing in
fixed assets is economical and healthy, the table-5 reveals the following facts.
The ratio of fixed assets to long-term borrowings has not been showing any
consistent trend. It has varied from -0.58 times to 0.83 (2013-2014).
The Hero Moto Corp Ltd has depended more on equity portion of funds rather than on debt
portion of funds.
TABLE-6
Years
2011-2012
2012-2013
2013-2014
2014-2015
2015-2016
Fixed Assets Ratio

Ratio
Change
19.0451
37.83982
-18.7947
54.16634
-16.3265
66.91727
-12.7509
46.7956
20.12167
75
Fixed Assets to Net Worth Ratio:

Formula:
Fixed Assets to Net Worth Ratio = Fixed Assets/ Shareholders Funds.
The ratio of fixed assets to net worth is another measure of solvency of the firm. It
indicates the extent of fixed assets financed by shareholders funds; generally dependence
on shareholders funds for financing of fixed assets is redistricted as cost of equity is
higher than cost external borrowings. The ratio of fixed assets to net worth of Hero Moto
Corp Ltd reveals the following.
a) The initial ratios of the investment are decreased from 383.75 Cr to -373.94 (20142015) constantly increased period of 5 years.
b) The amount invested by the shareholders funds in the year 45.74Cr (2012-2013).
c) The ratio has showing on increasing trend in all the years of observation except in
This shows the Hero Moto Corp Ltd is depending more on shareholders funds for
financing of fixed assets them external borrowings
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.
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.
76
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 Hero Moto Corp
Ltd is10%.
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.
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 earning 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%:
TABLE:7
YEARS
2011-2012
2012-2013
2013-2014
CFATS
PVIF @ 10%
PVS
0.909
4036.94
5657.83
0.826
3669.578
8014.59
0.751
4673.368
6018.957
77
2014-2015
2015-2016
7188.91
0.683
4910.026
6959.35
0.620
TOTAL:
4314.797
23586.73
LESS: Initial Investment:

NPV:
6636.97
16949.76
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
and
NPV > 0
NPV < 0
(ACCEPT)
(REJECT)
Hence in the case of Hero Moto Corp Ltd project it is visible that the positive NPV shows
the acceptance and importance of the project.
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.
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.
78
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)
IRR= R +
Higher NP
---------------------------- XR1
Difference of P V s.
8) Decision making(Accepting- Rejecting the proposal)
FORMULATION OF STEPS:
STATEMENT OF SHOWING CALCULATION NPV @88%,89%,90% UNDER
IRR
METHOD
(R s corers)
TABLE:8
YEARS Annua Discount
Discount
Discount
l CFA Rate-88%
Rate-89%
Rate-90%
Ts
PVF
PV
PVF
PV
PVF
PV
20114036.9 0.531 2143.6151
0.529 2135.5413
0.526 2123.4304
79
2012
2012-
4
5657.8
2013
2013-
3
8014.5
2014
2014-
9
7188.9
2015
2015-
1
6959.3
2016
0.292
1
0.157
9
0.085
8
0.046
1
1652.6521
0.2799
1583.6266
0.277
1567.2189
4
1265.5037
0.1481
1186.9608
0.145
1162.1156
6
616.80847
0.0783
562.89165
0.076
546.35716
8
320.82603
0.0414
288.11709
0.04
278.374
5
5999.4055
5757.1374
5677.4961
From the above calculations the following can be observed.

PV 0f net cash flows at 88% is: 5999.40cr
PV 0f net cash flows at 89% is: 5757.13cr
DECISION:
Since the initial investment RS.5897.64cr is lies between 88% and 89% the company
APTDC can determine the IRR as 88.5%
Hence IRR=88.5%
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.
80
The cutoff rate of Hero Moto Corp Ltd is 10%, which is less than the IRR i.e 88.5% hence
the acceptance of Hero Moto Corp Ltd is quiet a good investment decision taken by
management.
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

= - ---------------------------------------Initial cash outlay
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
TABLE:9
YEARS
CFATS
PVIF @
PVS
10%
2011-2012
0.909
4036.94
3669.578
81
5657.83
2012-2013
0.826
4673.368
8014.59
2013-2014
0.751
6018.957
7188.91
2014-2015
0.683
4910.026
6959.35
2015-2016
0.620
4314.797
23586.73
TOTAL:
TABLE:10
YEARS
2011-2012
2012-2013
2013-2014
2014-2015
2015-2016
CFATS
PVIF @ 10%
0.909
4036.94
5657.83
0.826
8014.59
0.751
7188.91
0.683
6959.35
0.620
3669.578
4673.368
6018.957
4910.026
4314.797
16505.98
TOTAL:
Profitability index
PVS

-------------------------------------Initial Investment
16505.98
= -----------------6636.97
= 2.58
Hence PI = 3years.
82
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.3years)
FINDINGS, SUGGESSIONS, CONCLUSIONS,BIBLIOGRAPHY

FINDINGS
83
The budgeting exercise in Hero Moto Corp Ltd 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.
Inducting at least three non -official directors the mechanism of the Search
Committee should restructure the Boards of these PSUs.
Feasibility report of the project is prepared on the cost estimates and the cost of
generation.
Scope of capital budgeting in Hero Moto Corp Ltd are

* Approved and ongoing schemes
New approved schemes
Unapproved schemes
Capital budgets for plant betterments
Survey and investigation
Research and development budget.
SUGGESTIONS
The capital budgeting decision for Hero Moto Corp Ltd is governed by a manual
issued by the planning Commission. It contains the following important provisions in
84
the regard: (1) It suggest the use of various project evaluation techniques, such as
return on investment (ROD, payback period, discounted cash flow (DCF) Evaluation
and Review Technique (PERT), Critical path method (CPM), and strengths,
weaknesses, opportunities and Threats (SWOT) Analysis.
The total assets turnover ratio of Hero Moto Corp Ltd recorded consistent
fluctuations from 0.41 (2011-2012) to 01.04 (2015-2016). The lowest recorded as
0.38 (2014-2015). This decline is an account of lower growth rates sales in those
years.
The fixed assets turnover ratio of Hero Moto Corp Ltd showing a fluctuating trend
and increased from 1.04 times (2011-2012) to 1.25 times (2014-2015). These
fluctuations any be due to fixed assets investment.
The ROI Of Hero Moto Corp Ltd did not record any consistent trend. It varied from
0.32% (2011-2012) to -0.12% (2015-2016).
The fixed assets ratio shows the fluctuating trends form 0.76 (2011-2012) to (20142015) as 1.15 and the funds were required then continuously declined.
The fixed assets ratio of Hero Moto Corp Ltd as shown continuously increasing from
0.76 (2011-2012) to (2015-2016) as 0.99.There fluctuations observed.
BIBLIOGRAPHY
85
Books:
-Financial Management
- Prasanna Chandra
-Management Accounting
- R.K.Sharma&ShashiK.Gupta
-Management Accounting
-S.N.Maheshwary
-Financial Management
-Khan and Jain
-Research Methodology
-K.R.Kothari
Internet Sites:
http\\:www.google.com
http\\:www.Hero Moto Corp Ltd.co.in
http\\:www.googlefinance.com
86

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CHAPTER-I

SCOPE OF THE STUDY:

NEED AND IMPORTANCE:

Analyze the proposals for expansion or creating additions capacities.

To decide the replacement of permanent assets such as building and equipments.

To make financial analysis of various proposals regarding capital investment so

OBJECTIVES OF THE STUDY:

3. To Assess the effectiveness of long term investment decisions of HERO MOTO

LIMITAIONS OF THE STUDY:

The amount of investment

Minimum rate of return on investment (k)

Return expected from the investments. (R)

Ranking of the investment proposals and

Based on profitability the raking is evaluated I.e., expected rate of return on

Factors Influencing Capital Budgeting Decisions:

project with a lesser payback period

Research and Development Projects.

RISK AND UNCERTANITY IN CAPITAL BUDGETING

Risk-Adjusted cut off rate or method of varying discount rate:

uncertain and requires adjustment and not the discount rate.

Risk Adjusted Cut off Rate

Decision Tree Analysis

Certainty Equivalent Method:

Standard Deviation Method:

Coefficient of variation Method:

Decision Tree Analysis:

Identification of the problem

Finding out the alternatives;

Specification of probabilities and monetary values for cash inflows;

Analysis of the alternatives.

Limitations of Capital Budgeting

STEPS INVOLVED IN THE CAPITAL EXPENDITURE

OBJECTIVES OF CONTROL OF CAPITAL EXPENDITURE

To compare periodically actual expenditure with the budgeted ones so as to avoid

6. To measure the performance of the project.

CAPITAL BUDGETING PROCESS

Capital Budgeting Steps:

Identification of Investment Proposals:

Final Approval and Preparation of Capital Expenditure Budget:

KINDS OF CAPITAL BUDGETING DECISIONS

Accept Reject Decision:

Mutually Exclusive Project Decision:

Capital Rationing Decision:

METHODS OF CAPITAL BUDGETING AND EVALUATION

Average Rate of Return.

Pay-Back Period Method

Time Adjusted Method or Discounted Method:

Net Present Value Method

Internal Rate of Return

Net Terminal Value Method

DISCOUNTED CAHS FLOW

PLAY BACK ACCOUNTING RATE

NET PRESENT VALUE

Average annual profits after taxes

Average investment over the life of the project

Accept Reject Value:

Pay Back Period:

For example, an investment of Rs. 40,000 in a machine is expected to produce CFAT

Accept Reject Criteria:

DISCOUNTED CASH FLOW/ TIME ADJESTED TECHNIQUES:

= rate of interest/ Discount rate

Internal Rate of Return:

Accept Reject Criteria: