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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGARSUGAR WORKS LIMITED, UGAR [ATHANI]
Table of Contents:Table of Contents:
Particulars Topic
Chapter I Executive Summary
Chapter II Methodology
Chapter III Introduction of Industries
Chapter IV Company Profile
Chapter V Introduction of the product Fragies
Chapter VI Financial Appraisal
Chapter VII Objectives
Chapter
VIII
SWOT analysis
Chapter IX Findings
Chapter X Bibliography
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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGARSUGAR WORKS LIMITED, UGAR [ATHANI]
I
EXECUTIVEEXECUTIVE
SUMMARYSUMMARY
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EXECUTIVE SUMMARYEXECUTIVE SUMMARY
Financial Appraisal of project is one of the most crucial aspect in the project
finance and investment decisions. This analysis is made on an on going project. It is
on the topic Financial Appraisal on Diversification scheme of Fragies. Fragies are
sugar cubes in the form of ship.
The analysis is based on the financial statement of the company. The main
financial statement used is Estimated Profit and Loss A/ C.
The financial appraisal of THE UGAR SUGAR WORKS Ltd., is analysed
through 5 years projection/ estimation in respect of Cash flow, Profit and Loss A/C
statement, Cost of project, Cost of Capital, Opportunity Cost, Net Present Value of
project, pay back period and Internal rate of return, sources of finance.
The following were the objectives of the study
1. To know the cost of the Project.
2. Time frame required to complete the Project.
3. Financing Method.
4. Cost of Finance.
5. Human Resource Required.
6. Commercial Business.
a. Preparation of Profit and Loss Account.
b. Preparation of Cash in Flow Statement.
c. Calculation of Net Present Value.
d. Payback Period.
e. Internal Rate of Return.
The methodology that was followed was through Primary and Secondary data
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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGARSUGAR WORKS LIMITED, UGAR [ATHANI]
METHODOLOGMETHODOLOG
YY
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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGARSUGAR WORKS LIMITED, UGAR [ATHANI]
MethodologyMethodology
The project titled Financial Appraisal of diversification scheme is the
analysis of financial Appraisal of THE UGAR SUGAR WORKS Ltd., Ugar-Khurd.
For this the reliance was on the primary data and secondary data. The
primary data was collected through personal interview of the staff of Finance
department, HR department, and Project manager. The secondary data was the
estimated P&L A/C prepared by the company for the diversification project.
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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGARSUGAR WORKS LIMITED, UGAR [ATHANI]
INTRODUCTIONINTRODUCTIONOF INDUSTRYOF INDUSTRY
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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGARSUGAR WORKS LIMITED, UGAR [ATHANI]
Introduction of IndustryIntroduction of Industry
India has been known as the original home of sugarcane and sugar. Indians
knew the art of making sugar since the fourth century. However the advent of modern
sugar industry in India dates back to mid 1930's when a few vacuum pan units were
established in the sub-tropical belts of Uttar Pradesh and Bihar.
Until the mid 50s, the sugar industry was almost wholly confined to the states of
Uttar Pradesh and Bihar. After late fifties or early sixties the industry dispersed into
Southern India, Western India and other parts of Northern India.
India is the largest consumer and second largest producer of sugar in the world.
The sufficient and well distributed monsoon rains, rapid population growth and
substantial increases in sugar production capacity have combined to make India the
largest consumer and second largest producer of sugar in the world.
The Indian sugar industry has not only achieved the singular distinction of being
one of the largest producer of white plantation crystal sugar in the world but has also
turned out to be a massive enterprise of gigantic dimensions. With over 450 sugar
factories located throughout the country, the sugar industry is amongst the largest agro
processing industries, with an annual turnover of Rs150bn. It plays a major role in rural
development and its importance for India stretches far beyond the role of a sweetener
supplier.
The sugar factories located in various parts of the country work as nuclei for
development of rural areas by mobilizing rural resources and generating employment,
transport and communication facilities. Over 45mn farmers, their dependants and a
large mass of agricultural labor are involved in sugarcane cultivation, harvesting and
ancillary activities constituting 7.5% of the rural population. The sugar industry
employs over 0.5mn skilled and unskilled workmen, mostly from the rural areas.
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Since the beginning of planning era, sugar industry operated under a policy of
partial control in 1950-51 and 1951-52, followed by a continuous period of six years of
decontrol between 1952-53 to 1957-58. This policy was followed under the pragmatic
leadership of the then Minister of Food, Shri Rafi Ahmed Kidwai. However, with his
departure, the perception of decontrol was lost.
After alternating between control and decontrol, the government adopted the
policy of partial decontrol in 1967-68 which has since been the mainstay of government
policy except for two short periods of decontrol in the 1970's. Under this policy, the
government procures 40% of production at controlled prices based on the Statutory
Minimum Price for sugarcane, for supply through the Public Distribution System andthe balance 60% is allowed to be sold by the mills in free market subject to the monthly
release mechanism. The details of past government policies for sugar industry are
provided in annexure 1.
The levy quota for sugar mills has been brought down from the peak levels of
70% in 1968-69 to the present levels of 40% as a gradual process of deregulation of
sugar industry.
The number of operating sugar mills in the country has increased from 29 in
sugar year (SY) 1930-31 to 412 by SY1996-97 (sugar year = October 1st to September
30th). The addition in number of mills was at its peak during seventies when nearly 100
mills were added between 1970 and 1980 to increase the number of operating units to
300. The development of industry in the past is as given in table below.
The average capacity of the sugar mills in the industry has considerably moved
up from just 644 ton per day in SY1930-31 to 2656 ton per day. But still the growth in
the Indian sugar industry was driven by horizontal growth (increase in number of units)
compared to the vertical growth witnessed in other countries (increase in average
capacity)
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Sugar year (Oct-Sept) Number of operating
sugar mills
Average capacity ton crushed per day
1930-31 29 644
1940-41 148 750
1950-51 139 882
1960-61 174 1172
1970-71 215 1394
1980-81 315 1718
1990-91 385 2088
.
India is the largest consumer (18mn tonnes) and the second largest producer of
sugar after Brazil. The country produced 201 lakh tonnes (20.1mn tonnes), the highest
ever, in 2002-03. But there was a drastic drop in production in the following two years
with just 135.46 lakh tonnes in 2003-04 and 130 lakh tonnes in `04-05. For the current
2005-06 season, the production is expected to be between 180-185 lakh tonnes. While
the production in Maharashtra is expected to double from 22.3 lakh tonnes in 2004-05
to 46 lakh tonnes in the coming season, Tamil Nadu, Gujarat, AndhraPradesh,
Karnataka and Uttar Pradesh would also witness a significant rise in production.
The sugar factories located in various parts of the country work as nuclei for the
development of rural areas by mobilizing rural resources and generating employment,
transport and communication facilities. Over 45 million farmers, their dependants and a
large mass of agricultural labour are involved in sugarcane cultivation, harvesting and
ancillary activities. The industry employs over 0.5mn skilled and unskilled workmen,
mostly from the rural areas.
After alternating between control and decontrol, the government adopted the
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policy of partial decontrol in 1967-68 which has since been the mainstay of the
government policy except for two short periods of decontrol in the 1970s. Under the
present policy, the government reserves 10% of the production at controlled prices for
supply through the Public Distribution System (PDS) and the balance 90% is allowed to
be sold by the mills in the free market subject to the Monthly Release Mechanism. The
levy quota for sugar mills has been brought down from the peak levels of 70% in 1968-
69 to the present level of 10% through a gradual process of deregulation of the sugar
industry. The Indian sugar industry has always been highly regulated by way of
requirements of essence for setting up or the expanding of the sugar factory restrictions
and control on the sale and dispatches of sugar, fixation of satisfactory minimum cane
price payable, fixation of levy sugar price, restriction on import and export, restriction
on stock holdings and so forth. With the government decision to liberalize the economy
since 1991, some of the restrictions were removed
The number of operating sugar mills in the country has increased from 29 in
1930-31 to 453 in 2002-03. The average capacity of the sugar mills has considerably
moved up from just 644 tonnes per day in 1930-31 to 3343 tonnes per day in 2002-03.
The growth in the Indian sugar industry was driven by horizontal growth (increase in
number of units) compared to vertical growth witnessed in other countriesIndian sugar industry can be broadly classified into two sub sectors, the
organised sector, i.e, sugar factories, and the unorganised sector, i.e, manufacturers of
traditional sweeteners like gur and khandsari. The latter is considered to be a rural
industry and enjoys greater freedom than the sugar mills. The production of traditional
sweeteners gur and khandsari is quite substantial. Gur is unrefined sugar and khandsari
is non-centrifuged sugar. These are mostly used in villages and rural folk as sweeteners
and also as important sources of nutrition. Though the trends indicate a progressiveshift from traditional sweeteners to white sugar over the years, they still account for
about 37% of total sweetener consumption in India.
Since the sugar industry in the country uses only sugarcane as an input, sugar
companies have been established in large cane growing states like Uttar Pradesh,
Maharashtra, Tamil Nadu, Karnataka, Punjab and Gujarat. Maharashtra leads in the
number of sugar mills, which are mainly in the cooperative sector, and also in sugar
production, followed by Uttar Pradesh. The farmers cooperatives own and operate the
largest of the industry's total capacity. They are concentrated primarily in Maharashtra
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and Eastern Uttar Pradesh. The largest number of sugar companies in the private sector
is located in south India, in the states of Tamil Nadu, Karnataka and Andhra Pradesh.
Uttar Pradesh has also some private mills which are operating in a very large scale. Out
of the 453 sugar mills in the country, 269 are in the cooperative sector, 184 in the
private sector and 67 in the public sector. Besides, 136 units in the private sector are in
various stages of implementation. In India sugar production follows a 5-7 year cycle.
Sugar production increases over a 3-4 year period, reaches a high, which in turn, results
in lower sugar prices. As a result of lower sugar price, realizations of sugar mills, the
sugarcane arrears increase. The increase in sugarcane arrears results in lower sugarcane
production, resulting in lower production for the next 2-3 years. Because of lower sugar
production, the prices shoot up resulting in increased area under sugarcane cultivation
during the next season.
Due to heavy domestic consumption (approximately 18mn tones), India is not in
a position to export sugar in large quantities. This year the export could be around five
lakh tonnes. The export would be primarily the obligation that the importers of raw
sugar would have to fulfil. Moreover, the mills would find it more profitable to sell in
the domestic market rather than export it. Currently, export price for white sugar is
$340-350 a tonne f.o.b (Rs 15,375-15,825). In the domestic market, medium sugar isruling at Rs 18,740-19,270 a tonne, while small sugar is quoting at Rs18,110-18,410.
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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGARSUGAR WORKS LIMITED, UGAR [ATHANI]
Chapter IV
COMPANYPROFILE
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CompanyCompany ProfileProfile
History and Origin
About sixty years ago Ugar Khurd was a small hamlet in the erstwhile
princely state of Sangli. It was however blessed with two great advantages. On its
south flowed the perennial river Krishna and on the north, was situated the railway
station of Ugar Khurd on the meter gauge line between Miraj and Bangalore, now
changed to broad gauge.
Conditions were ideal for somebody to harness the two advantages and
exploit the fertility of the loamy soil. An abortive attempt was made in late thirties to
start a sugar industry. After that, the then ruler of Sangli invited the late
Dr.S.R.Shirgaokar - who had previous experience of setting up a sugar factory at
Kolhapur, to embark on the unexplored venture which he did with great dexterity
and the slumbering village of Ugar Khurd was transformed into a humming
industrial township in a few years. Today, Ugar is equivalent to a mini city with a
decent sized population and having agriculture concentrated employment
surrounding the sugar manufacturing focused township.
Dr. S. R. Shirgaokar deputed his competent nephew Shri.V. S. Shirgaokar to
purchase a sugar plant from Moholi Sugar Factory in Sitapur District in Bihar and
install it at Ugar Khurd. The Ugar Sugar Works hence found a very competent
navigator in one of its visionaries- Late Shri V.S.Shirgaokar. The 500 TCD plant
was purchased, installed and the first crushing season was started on the 21st of
April, 1942. The crushing capacity of the company underwent further expansion.
(10,000TCD) Presently, the crushing capacity of the organization is 14,000 TCD.
(Ugar, Unit-Tasgaon SSK, Unit-Phalatan)
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Present Scenario of The Ugar Sugar Works Ltd:
The present capacity of cane crushing is 10 thousand Metric tones per day. The
work performed during the season period is in the three shifts. First Shift is from 4.00
am to 12.00 pm, second shift from 12.00 pm to 8.00 pm and third shift from 8.00 pm to
4.00 am. The crushing of sugar cane is carried out in two mills known as 33 X 66
(small mill) and 42 X 84 (big mill). The cane carried through bullock carts is crushed
in 33 X 66 and the cane carried through truck and tractors is crushed in 42 X 84. This
order will change only if there is any problem to one of the mill.
The sugar is packed in 50 kgs. and 100 kgs. Bags. This sugar bagging process is
fully automatic.
Board of Directors:
1. Mr. Rajendra V. Shirgaokar
2. Mr. Prafulla V. Shirgaokar
3. Mr. Shishir S. Shirgaokar
4. Mr. Baba N. Kalyani
5. Mr. Bapugouda S. Patil
6. Mr. Shrikrishna N. Inamdar
7. Mr. V. Balsubramaniam
8. Dr. Mallappa R. Desai
9. Mr. Madhusudan B. Karmarkar
10. Mr. Manohar G. Joshi
11. Mr. Algonda B. Kage
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12. Mr. Deepchand B. Shah
Group of Companies:
1. The Ugar Sugar Works
2. SB Reshellers Pvt. Ltd.
3. Shantaram Machineries Pvt. Ltd.
4. Sadashiva Sugars Ltd.
5. Tara Tiles Pvt. Ltd.
6. The Pavilion Hotel
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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGARSUGAR WORKS LIMITED, UGAR [ATHANI]
1. Finance Department
Finance is the most important department in the organization. It plays very
important role in the organization. Finance is the life blood of each and every
business. Management of financing is planning and controlling of firms financial
resource.
The finance officer occupies a key position. He is one of the dynamic
members of the top management key, and his role day by day is becoming more
intensive and significant in solving the complex management problems.
The Finance Department is subdivided into three departments as under.
A. Accounts Department
B. Cane Accounts Department
C. Cost and Audit Department
Accounts Department: Deals with day to day financial activities of
maintaining accounts i.e. entry of day to day transactions, issue of cheque, preparing
Trial Balance, Profit and Loss Account, Balance Sheet, maintaining Bank Accounts,
Cash Management, Purchase and Sales Accounts. The books of account maintained
by the company are:
1) Sales records: Sales records are maintained
for each of the sold sugars and other product.
2) Purchase Records: Purchase records are
maintained for the purchase of various items.
3) Expenses Records: The records are
maintained for the purpose to make entry for various expenses incurred in a
particular period of time.
4) Stock Records: Stock records are
maintained to know the levels of stock of various items for the particular
period of time .These are both in terms of rupees and units.
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5) Budgets: A budget provides an easy
method of continuous monitoring of activities of the organization. A master
budget, which takes into, accounts all activities of an organization.
Following are the budgets prepared:
i. Budget Profit and Loss A/C.
ii. Budget Trading A/C.
iii. Budget Fund Flow Statement.
iv. Budget Balance Sheet.
v. Sales Budget.
vi. Cash Budget.
vii. Expenses Budget.
Cane Account Department: Deals with the farmers in purchasing cane and
making time to time payment, advance payment, transporting, maintaining the detail
information through Weigh Bridge Department about weight of the cane while it
comes to the factory, maintaining daily report like Crushing Report, Sugar Bagging
Report, Baggasse and other material like Trash, Ash, Sugar, Chemicals and other
raw material in and out.
Cost and Audit Department: The functions of Cost and Audit Department:
1. The internal audition of various areas of each and every department
including revenue and expenditure side.
2. Cost Accounting work of U.S.W. Ltd. Products like sugar, rectified spirit,
denatured spirit, power and Indian made liquor product.
3. Periodical physical checking of following departments about their inventory
books of accounts of the stores, time keeper office etc.
4. Preparation of additional data feedback for management audit committee or
any other department required.
5. Special audit of various departments like Agriculture Department, Account
Department, Time Keeper Office, R & D Department, Civil Construction Projects,
Cane Purchase Department Etc.
6. Checking of Closing Stock Statement.
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7. Suggesting remedial actions in case of increased cost.
The software package used in finance department is Tally and Own Created
software by the IT Department.
2. Personnel Department
This department undertakes the activities like Recruitment, Selection,
Labour Welfare Activities, Social Activities. Department holds a meeting once in a
week with Top Management. The department has four different committees.
1. Canteen Committee
2. Work/ Grievance Cell Committee
3. Safety Committee
4. House Keeping Committee
Labour Welfare Activities
o Statutory Provisions:
The Ugar Sugar Works provides the statutory provisions under the
Factories Act 1948 like Safety, Health Awareness, Work Environment, Lighting,
Ventilation, Drinking Water Provision, Spittoon, and Toilet. The Labour
Welfare Officer deals personally with the employee problems may be related to
workplace or personal life of the employee. He councils the employee or worker
personally and try to settle the problem.
Additional Facilities:
Education:
Ugar Sugar Works has contributed whole-heartedly in the field of education,towards the betterment of the residents of this region.
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Bal Mandir:
This is a playschool for the young children
Shri Hari Vidyalaya:
Shri Hari Vidyalaya is a school, which is home to over 3000 students. This
school has a curriculum which covers the following mediums of instruction
under the primary and secondary sections :
English Medium
Marathi Medium
Kannada Medium
Shri Hari Vidyalaya Pre-University & Degree College:
This college is operating for a number of years
at Ugar Khurd. It has Arts, Commerce and
Science (first year) facultys for a Bachelors
Degree. It houses over a 1000 students
Shri Babukaka Shirgaokar Technical Educational Trusts:
Industrial Training Institute (ITI):
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The ITI was started in the year 1994 in
honour of our then MD, Shri Babukaka
Shirgaokar.:
This institute provides technical training in the following disciplines
i. Fitter
ii. Electrician
iii. Instrument Mechanic
iv. Computer Technology Trade
v. Cutting and Sewing
Hospital:
The Dr. Shirgaokar Hospital is very well
equiped in the following areas:
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State of the Art Laboratory
X-Ray Units
An Air-conditioned Operation Theatre
Dental and Orthopedic Section
Accommodation for 32 indoor patients (32 beds)
Qualified staff of doctors and nurses to take care
of the patients.
Treatment at subsidized rates
Eye camp every week
Quarters Approximately 132 apartments and 400
quarters provided on rent-free basis.
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Biogas
Biogas supplied to workers colony (for 85 quarters at concessional rate)
Food Grains
Food Grains are distributed to workers free of cost once in a year.
Additionally Ugars sugar is provided to shareholders and cane growers at a
well discounted rate.
TV Cable Connection
TV Cable connections are given at nominal charges.
Medical Camp
Organising various types of medical camps viz. Dental, Eye,
Tubectomy, ENT, Diabetic Detection Camp, Blood donation, etc.
Workers Day
Celebrating workers day on 2nd October every year and felicitating the
retired workers and high performers during the year.
Training Programme
Organizing Workers / Staff Training Programme.
Ugar Wartha
Circular of monthly Ugar Magazine.
Alcoholics Anonymous Group Meeting
Conducts the Alcoholics Anonymous meeting for the group of fellows,
who desires to give away drinking through the inter group (self-supported) of
General Service office of Alcoholics Anonymous (India). Meeting held twice in
a week.
Sakhar Shala Project
The non formal school runs for the childrens of the Harvesting
workers(Gabali) during crushing season to bridge the gap of academic year and
to keep touch with education during stay at factory(work) site, with the help of
social organizations like Lions Club & Mahila Mandal.
Shri Vinayakrao Shirgaokar PratishhtannBabasabpatilfreepptmba.com Page 22
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Awards:
Shri S V Parthasarathy's Award for
outstanding performance in sugar industry
for the
season 1984-85
National Safety Award
1984 for largest Accident
free Period
Social Activities
Arranges Camps like Netra Shibir, Dental Camp, Arrangement of Place,
Water and other necessary things at the time of Laxmi Yatra once in a year. Provides
donations for other religious works, educational institutes, and sufferers of natural
calamities.
3. Information Technology (IT) Department:
IT Department distinct The Ugar Sugar Works from other sugar factories. It
has its own IT Department, which is very well developed. This department develops
the software as per the requirements of the different departments. It efficiently
solves any technical problem related to the computer hardware as well as software in
the different department. Various qualified and efficient hardware and software
engineers are there in this department.
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4. Purchase Department:
This department accepts the requisitions from the different departments, in
which the material needed, quality and quantity is mentioned. They have the vendors
list and they ask quotations from them. Finally after receiving the quotation they
place the order to appropriate vendor. The purchase order has four copies. From that
one has sent to Accounts Department, one to the Vendor, one to the department from
which the requisition is received and last is retained with themselves for reference.
This department work according to the Just In Time method. Means it does not
blocks the funds of the company.
Purchase Department does not place orders for capital goods. It deals with
the materials, which are necessary to run day-to-day activities of production,
stationary material etc.
This department uses the software developed by their IT department from
FoxPro for keeping records and placing orders. Also they use the other windows
programs like Ms-Office (Ms-Word, Ms-Excel, Ms-PowerPoint) for documentation.
5. Issue Department
This department is also known as Stores Department. The material
purchased from Purchase Office first comes to the stores department. Here the
stores incharge records the transactions means takes the stock and files the
documents received from the vendor and purchase office. Then this department
supplies or issues the material to other departments according to their need or
requisition.
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6. Production Department
The Ugar Sugar Works Ltd, production department comprises the Factory
Manager with his team of Engineers and Operators. He reports to the chief i.e.
works manager. Here the main production is sugar. For producing the sugar there is
a very vast process. Engineers and operators do this process. Here one more small
but very important process joins to the process of producing sugar i.e. chemical
mixing into the cane juice. For this there is a small department called chemical
department. Then after this all process the final product i.e. Sugar produces. Within
all this some by products are also obtained like baggase, molasses, steam etc. Theproduction department does all above-mentioned process. Sugar bagging i.e.
production of sugar for the last season i.e. 2005-06 is
7. Cane Purchase Office Department
This department deals in purchasing cane from farmers for sugar production.
It maintains all the details of the farmer and the cane also. In these details they
mention the type of sugar cane, area, farmer name, transporter name, no. of
kilometers the place or farm is from factory etc. Then they make a bond with the
farmer for giving the cane to the factory and lastly issue the Cane Purchase Order to
the farmer.
8. Research and Development Department (R&D)
This is one of the most important department in the Ugar Sugar Works Ltd.The company carries the research and development in Sugar cane, process
modification for sugar production, quality liquor and Ethanol production,
Improvement in Technology, Co-Generation and bio-methanation from press mud
and zero effluent discharge system. This results in Product improvement, cost
reduction, product development, import substitution etc.
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Sugar Cane: The main objective of the Research and Development team is to make
continuous effort to find out dual purpose sugarcane varieties with high sucrose,
high yielding potential and reasonably high fibre content. There are 40 odd new
sugarcane varieties under trial in this department.
Short Duration Crops: The work with wheat, soybean and sunflower is reasonably
successful as rotation of crops and useful indications are likely to be obtained.
Future Plans of Action:
a) To popularize the technique of using Wormi-
compost and Boiler ash.
b) Replacement of Muriate of Potash by organic Bio-
k, a product of SSP Plant of concentration. Evaporation and drying system for
zero pollution.
c) To locate soybean varieties resistant to rust.
d) To find out effective biological measures, which
would cause no ecological problems and shift from the paradigm of pesticidal
control to biological control so as to successfully combat white Woolly Aphid
trouble (Ceratovacuna lanigera Zehnt) with conobartha aphidivora (Dipha),
Micromus Sp.(Brown lace wing) and syrphidfly.
e) To identify multipurpose cane varieties, which
can give good yields, good recoveries, high fibre and resistant to insect pests.
f) To utilize Moist Hot Air Treatment Plant
(MHAT) to prolong the life of productive good cane varieties.
g) To establish Leaf Sheath Moisture, Soil and Plant
Tissue Culture Laboratory.
h) Replacing 50% chemical fertilizers with suitable
combination of organic and bio-fertilizers to get the best cane both from the
point of quality and quantity.
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Different Product Manufactured
The Ugar Sugar Works Limited is the flagship company of the Shirgaokar
Group of Companies. This organization is located in a township by the name-
Ugar Khurd, Karnataka, close to the border of Karnataka & Maharashtra. Ugar Khurd
is nicely located on the banks of the river Krishna.
The main businesses of parent company are manufacturing of:
1. Sugar
2. Power
3. Indian Made Liquor
4. Industrial Alcohol
5. Ethanol
1) Sugar:
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The Ugar Sugar Works Limited is the largest single location manufacturer
of sugar in Southern India with a licensed capacity of 10,000 TCD. Ugar
manufactures more than 1.5 million bags of sugar annually. The main product of
the sugar manufacturing process is White Crystal Sugar.
This white crystal sugar is manufactured in the following grades :
i. M-30
ii. S-30
iii. SS-30
Byproducts:
Bagasse:
Bagasse is a residual material left after the extraction of juice from sugar
cane. In Ugar Sugar, it is captively used as a fuel by which the industry is self
sufficient for its fuel requirement. The excess is saved to the tune of 5% of
weight of the cane crushed. The saved bagasse can be selectively used as fuel in
the lean period / off-season or sold to the interested parties.
Filter cake:
Filter Cake commonly known as Press mud is the suspended impurities
separated during the process of cane juice clarification by the sulphitation
process. The material is used as manure and the factory manages to sell the filter
cake to the cane growers at concessional rates & achieves recycling of the matter
back to fields.
Final Molasses:
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It is a highly viscous left-over material containing sugar / reducing sugar and
organic/inorganic impurities. It is a raw material for distilleries of our
organization.
2) Power :
Cogeneration is a process, which simultaneously produces two or moreforms of useful energy such as electrical power and steam, electric power and
shaft (mechanical) power etc.
Ugar has been a pioneer of cogeneration in the sugar industry in India, Over
the years, The Ugar Sugar Works has reached (in 2-3 phases) a capacity of 44
MW of power, of which 15 MW is used for captive consumption and the balance
28 MW is fed to the grid (KPTCL).
Power shortage has made the sugar industry realize that by using high
pressure Boilers and Turbines from the same amount of input fuel, (i.e. Bagasse)
they can generate up to 2 to 3 times more power and after meeting the captive
requirements, the surplus power can be exported to the grid.
A sugar factory requires both electrical power & process steam for its
operation. With the Indian Government announcing various fiscal incentives for the
use of non-conventional renewable energy for cogeneration in sugar factories, it has
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become a viable proposition to adopt high pressure & efficient boilers using bagasse
to generate steam & power economically to make available surplus power for export
to the grid.
This is the single largest cogeneration plant in all of India using non-
conventional energy sources i.e. bagasse and trash. Our group has now startedconsulting to sugar industries in India as well as in overseas through our group
company - Ugar Power Generation Consultants Pvt. Ltd (UPGCL). The focus of this
new outfit revolves around consulting on new co-generation projects, equipment
procurement, erection & implementation right up to final commissioning in the
cogeneration sector.
Lots of steps have also been taken by the organization to ensure maximum
conservation of energy.
3) Indian made Liquor:
Ugar currently has two distilleries in premises at Ugar Khurd. The first one
is an old distillery of capacity 30,000 LPD, while the second one is a newly
constructed distillery from Praj Industries, Pune having a capacity of 45,000 LPD.
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The Praj Distillery runs on the continuous fermentation technology. The whole unit
of distillation process is having material of construction in copper, which gives a
very good quality of spirit. This plant is having a high level of computerization and
automation.
Two distilleries with a total capacity of 75,000 bulk liters per day.
The primary products coming out of the distilleries are:
i. Rectified Spirit
ii. Indian Made Liquors
iii. Absolute Alcohol (Ethanol)
iv. Arrack
v. Industrial Alcohol
Some of the well-known brands in the marketplace are Old Castle Premium
Whisky, Old Castle Rum, US Rum, US Whisky, Vatted Malt Whisky, Sandpiper
Whisky, Gentlemans Whisky, Ugar Doctors Brandy, Gagarin Vodka and US Gin.
New Projects & Growth
Sugar Ship EOU
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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGARSUGAR WORKS LIMITED, UGAR [ATHANI]
EOU for the Manufacture of Sugar Cubes in the form of Ships. The Ugar
Sugar Works Ltd. Has received approval for setting up a 100% Export Oriented Unit
for the manufacture of sugar cubes in the form of ships at Ugar Khurd.
The Building work is in progress and the machinery will be imported from
M/s. Klockner Haensel Processing GMBH Germany (JV Partner) who will be
providing the necessary technology. The machinery is expected to be installed
between March 2006 & July 2006 and commercial production will begin from
August 2006.
The entire production of sugar ships will be exported to Fragies Verwaltung
GMBH, Germany, who have agreed to purchase the entire production of 45,00,000
boxes p.a. for a period of 5 years
Greenfield Project - Sadashiva Sugars Ltd.
LocationNainegali Village, Taluka & District: Bagalkot,State: Karnataka.It is about 0.5 km from the
NH 13
Land Area The land measuring about 162000 sq. mts shall be
required for the entire factory and administrative
setup.
Main Product White crystal Sugar
By Products a) Cogeneration
b) Power
c) Press-mud
Licenced Capacity Sugar 2500 TCD (expandable to 5000 TCD)
Cogeneration Power Plant 15MW
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The land acquisition and machinery procurement work is in progress. The
installation of machinery will be completed by the end of 2006 and 2006-07 will be
a trial crushing season for Sadashiva Sugars.
Greenfield Project-Jewargi
Location Malli Village, Taluka: Jewargi, Dist: Gulbarga, State:
Karnataka. It is about 15 kms from Sindagi on the
State Highway No.12
Land Area The land measuring about 162000 sq. mtrs shall be
required for the entire factory and administrative
setup
Main Product White crystal Sugar
By Products a) Cogeneration
b) b) power
c) press-mud
Licenced
Capacity
Sugar 2500 TCD (expandable to 5000 TCD)
Cogeneration Power Plant 15MW
The land acquisition and machinery procurement work is in progress. The
installation of machinery will be completed by the end of 2006 and the 2006-07
crushing season will be a trial season for this new project.
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Ugar Sugar-Unit Tasgaon SSK
The Ugar Sugar Works-Unit Tasgaon SSK (Leased Plant)
The Company has taken on lease, Tasgaon Taluka Sahakari Sakhar
Karkhana Ltd., Turchi, (Tasgaon). This plant is having a capacity of 2750 TCD per
day. The lease agreement with Tasgaon SSK has been signed for a period of 6 years.
Commercial pro Ugar Sugar-Unit Tasgaon SSK has crushed a total of 2.22
lac MT for the season 2005-06. The total bagging for this season amounts to 2.50 lac
quintals.duction has commenced.
Ugar Sugar-Unit New Phaltan Sugar
The Ugar Sugar Works-Unit New Phaltan Sugar W The Company has taken
on lease New Phaltan Sugar Works Ltd., situated at Sakharwad Taluka Phaltan
Dist.Satara. This plant is approximately 100 kms from Pune.orks (Leased Plant).
This plant has a capacity of 1250 TCD. The lease agreement with New Phaltan
Sugar has been signed for a period of seven years. Commercial production hascommenced. Ugar Sugar-Unit New Phaltan Sugar has crushed a total of 1 lac MT
for the season 2005-06.
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FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGARSUGAR WORKS LIMITED, UGAR [ATHANI]
INTRODUCTIONINTRODUCTION
ABOUT THEABOUT THE
DIVERSIFICATIODIVERSIFICATIO
NN
FRAGIESFRAGIES
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Introduction about the Diversification ProjectIntroduction about the Diversification Project
FRAGIES
The production of new product called fragies is a sugar cube in the form of
ship. This unique project is undertaken in the village Ugar-khurd, Dist:-Belgaum ,
State:- Karnataka.
The company has entered into a buy-back agreement with the Fragies
Vorwaltung GMBH Germany. The project is unique in itself. It is first time in the
world such a project is undertaken, because the sugar cubes will be introduced in the
form of ship.
What are fragies:- Fragies are a floating and exciting alternative to the rather
dull sugar cubes. To allow easy dosing through their weight is exactly alike, 3grams.
Fragies are produced of three sugar components of different states of
aggregation. The sophisticated combination makes floatable fudges out of which the
boats are formed.
Fragies make the ideal media for any catering, customer client, the
showbiz or the convience sector. It has a appealing look.
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The fragies will be introduced in four varieties.
1.Fragies Coffee
2.Fragies Cappuccino
3.Fragies Tea
4.Fragies Taste
The color make the difference so that fragies taste comes with an additional
flavour. As an extra effect all four varieties of fragies exhibit a different dissolving
speed. The longer they float the more fun in cup of drinking.
By Product
Fragies will not have any by product.
Availability of raw materials, water, power.
1) Raw material:
The plant is located close to the existing sugar factory. The raw material for
fragies is sugar, which is easily and readily available. The raw material i.e. sugar
required is 10% of the production i.e. Rs226.80 lacs.
2) Water:
Ugar Khurd is blessed on its south flowed the perennial river Krishna. The
existing infrastructure at Ugar which caters for the main sugar plant is also available
for this plant.
3) Power:
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Power will be drawn from the co-generation plant of the main product.
Market for finished product:
The company has entered into buy-back arrangement with the fragies
Verwaltung GMBH, Germany. The Germany Company has agreed to buy 22.5
Million boxes (i.e. approximately 56.25 lakh Kgs.) within period of five years or up
to achievement of net profit of 3.5 Million euros by the manufacturer whichever is
earlier. The customer will establish the letters of credit for the purchase of the
product.
Technology and Know-how:
The Germany Company has agreed to provide the necessary technology and
Know-how. Kloeckner Hacnsel Processing GMBH, Germany, will supply the entire
machinery. The product will be manufactured as per the specification provided by
the Germany Company.
Packaging of the Product:
Proper packing of fragies is very important. As each fragies consists of just 3
gms. It is very delicate. Importance of this product lies in its shape, design. So care
should be taken that the product is handled carefully. So packaging is of utmost
important. The product will be accepted only up to maximum 2% of defects.
Packaging will be given on contract basis. One of the company from
Ratnagiri will supply the packaging material.
Rationale of EOU Plant:
1. As it is located very close to the existing sugar plant at Ugar Khurd, the
raw material and power availability is in abundance.
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Financial Appraisal
Capital Investment includes all the expenditures which are expected to produce
benefits to the firm over a long period of time, encompasses both tangible and
intangible assets. Some companies classify capital expenditure in a manner, which
provides useful information for decision-making.
Which project to be selected is one of the critical decision-making process. It
depends on certain criteria. Identifying financial appraisal of project is one of the
critically important and complex stage. The shareholder wealth maximization goal
states that the management should endeavor to maximize the net present value of the
expected future cash flows to the shareholder of the firm. NPV refers to the discounted
sum of the expected net cash flows.
The shareholder wealth maximization goal reflects the magnitude, timing and
risk associated with the cash flows expected to be received in the future by
shareholders. The NPV is discounted at the rate of cost of capital.
Cost of capital is the minimum expected rate of return. The company must earn, the
minimum return so as to satisfy the shareholders.
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ObjectivesObjectives
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Objectives of the Project
7. To know the cost of the Project.
8. Time frame required to complete the Project.
9. Financing Method.
10. Cost of Finance.
11. Human Resource Required.
12. Commercial Business.
a. Preparation of Profit and Loss Account.
b. Preparation of Cash In Flow Statement.
c. Calculation of Net Present Value.
d. Payback Period.
e. Internal Rate of Return.
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Introduction
Finance is regarded as the life blood of the business enterprise. This is because
in the modern money oriented economy finance is one of the basic foundations of all
kinds of economic activities.
Decisions with regard to the investment in the current assets and fixed assets are
significant as they determine the size of the firm, financial requirement, extent of
business risks etc.
Investment decision pertains to long term investment is crucial. It is absolutely
necessary that the firm should carefully plan its investment program so that it may getthe finances at the right time and they are put to most profitable use. An opportune
investment decision can give spectacular results. On the other hand an ill advised and
incorrect decision can jeopardize the survival of biggest firm.
1. To Know the Cost of Project:
Cost of the project means the capital expenditure. It includes investment in
fixed assets. The overall cost of this new project is estimated to be Rs.22, 70,00,000 i.e.384745.76 Euro (1 Euro = Rs.59). The main machinery costs Rs.17, 70,00,000, which
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also includes erection cost. The machinery is tailor made. This machinery is
exclusively used for the production of fragies. The machine cannot be alternatively
used for production of any other products. The Germany Company has agreed to
provide the necessary technology and Know-how. Kloeckner Hacnsel Processing
GMBH, Germany, will supply the entire machinery. The cost of ancillary machinery is
Rs.2, 00,00,000. The building cost Rs.3, 00,00,000. The project building is erected in
the premises of present sugar factory. So there is no any addition investment in the
purchase of land. Here we can say that land is efficiently utilized by the organization.
Cost of Project:
Particulars Amount
Main Machinery - 17,70,00,000
Ancillary Machinery - 2,00,00,000Building - 3,00,00,000Total Cost of Project - 22,70,00,000
2. Time frame required to complete the Project:
This project has not still started with the production. The erection of the
building and installation of the machinery will be completed by November 2006.
The company has entered into buy-back arrangement with the fragies Verwaltung
GMBH, Germany. The Germany Company has agreed to buy 22.5 Million boxes
(i.e. approximately 56.25 lakh Kgs.) within period of five years or up to achievement
of net profit of 3.5 Million euros by the manufacturer whichever is earlier.
After five years either the contract may be renewed or the known how will
be registered by the name of Ugar Sugar Works.
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3. Financing Method:
One of the important function of finance manager is to assemble required
amount of funds from different sources. Problem of finance is not much felt by the sole
trading organization, partnership firms etc. because they are run on small scale. But the
real financial problem is faced by corporate enterprises, which are operated on a very
large scale. It is necessary to be familiar with different sources of funds for meeting
various financial requirements of an organization. The method of collecting funds is
linked up with the period and the purpose for which funds are required. It is also
necessary to consider the cost of capital before taking any decision relating to the
selection of sources funds supply.
The Ugar Sugar Works Ltd. Is a Public Ltd. Company under private sector.
Public company is a company where the shareholders are more than fifty. Ugar Sugar
Works has 18000 shareholders with share capital of Rs.9 Cr. These shares are listed in
Bombay stock exchange with the face value of Rs.1 each.
As per the Companies Act of 1956 the company is allowed to issue only equity
share. The company cannot issue debentures and preference shares. The additional
fund requirement is fulfilled by borrowings i.e. long-term loans.
A firms capital generally consists of own fund and borrowed funds that
represent combine investment in a business. The optimum capital structure is one that
maintains the ideal ratio between different types of securities issued by the company.
For this new project i.e. the production of fragies the company has not issued
any equity shares. It has raised funds through internal/retained earnings i.e. promoters
contribution and borrowings. This unit is 100% export oriented.
Promoters contribution: Promoters contribution is nothing but the retained earnings.The entire amount of profit is not distributed by the way of dividend to the
shareholders. It is also referred to as self- financing or internal financing or re-
investment. It is nothing but the re-investment of on savings accumulated over the years
by transferring certain portion of the net profit to the reserves of a company.
When the company uses the fund of one unit to the unit, it is known as Intra
Fund Transferring. It is a most economical method of financing. It is an ideal source of
financing for expansion, modernization and diversification. It is neither expensive nor
subject to any legal complications.
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Borrowings / Loans: Generally loans are meant to serve the long term financial
purposes of a business concern. Loans represent and advance granted on a separate
account called loan account. Interest is charged on the whole amount sanctioned to the
customers.
The loan is borrowed from Robo Financial Institution, Singapore Branch at rate
of 4.5%. The company will get the loan in the form of Euros, which will be then
converted, into Indian currency. The company has to pay back the loan again in the
form of Euro. As the devaluation of currency is subject to fluctuation the company, uses
forward cover/hedging to avoid risk. After every 6 months this forward cover/hedging
is renewed.
Capital Structure:
Particulars Amount
Borrowing / Loan from Robo International - 14,16,00,000Promoters Contribution / Internal Fund - 8,54,00,000
22,70,00,000
4. Cost of Financing / Capital:
Cost in simple terms means sacrificing something such as time, money,
material, man hours for the production of goods any other factor, it too has cost.
The projects cost of capital is the minimum required rate of return on funds
committed to the project, which depends on the riskiness of its cash flows. The
investment project undertaken by a firm may differ in risk, each one of them will have
its own unique cost of capital. Cost of capital determines the suitability of investment
proposals. When a company has before it, two different investment proposal, in order
to select best investment proposal, which will give more return, the calculation of cost
of capital is essential.
Thus the cost of capital is The Rate that must be paid to obtain funds for
business activities. It is the minimum rate of return a company earns on its investment
in order to give expected income to the equity shareholders.
Significance of Cost of Capital:
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a. Investment Evaluation:
The primary purpose of measuring the cost of capital is its use as a financial
standard for evaluating the investment project. In the NPV method, an investment
project is accepted if it has a positive NPV. The projects NPV is calculated by
discounting its cash flow by the cost of capital. In the sense, the cost of capital is the
discount rate used for evaluating the desirability of an investment project. In the IRR
method, the investment project is accepted if it has an internal rate of return greater than
the cost of capital.
b. Designing Debt Policy:
The debt policy of a firm is significantly influenced by the cost consideration.
The interest tax shield reduces the overall cost of capital, though it also increases the
financial risk of the firm. In designing the financial policy, that is, the proportion of
debt and equity in the capital structure, the firm aims at maximizing the firm value by
minimizing the overall cost of capital. The cost of capital can also be useful in deciding
about the methods of financing at a point of time.
c. Performance Appraisal:
The cost of capital framework can be used to evaluate the financial performance
of the top management. Such an evaluation will involve a comparison of actual
profitability of the investment projects undertaken by the firm with the projected overall
cost of capital, and the appraisal of the actual cost incurred by the management inraising the required fund.
Component of Cost of Capital:
The cost of capital consists of different sources of capital.
i. Cost of Equity
ii. Cost of Preference Shares
iii. Cost of Retained Earning
iv. Cost of Debt
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i. Cost of Retained Earning:
Undistributed and accumulated profit represents Retained Earning. Retained
Earning is also a source of funds that can be used by a company conveniently without
having to pay any dividend on these funds. Therefore, it is assumed that the source of
finance is cost free. In fact, retained earnings have opportunity cost. The opportunity
cost of retained earning is dividend sacrificed by the shareholders. Had this dividend
been paid to the shareholders, they would have invested on some other company shares
and earned at least a minimum rate of return which is calculated in a similar manner as
the cost of equity capital, without giving effect to income tax and brokerage cost
consideration.
Computation of cost of Retained Earnings:
Kr = Ke ( 1 t ) ( 1 b )
Here:
Kr = Cost of Retained EarningKe = Cost of EquityT = Tax Rate
B = Brokerage RateKe = 8%T = NilThe project is 100% export oriented so the tax is exempted.B = Nil
Kr = Ke ( 1 t ) ( 1 b )
Kr = 8%
ii. Cost Debt Capital:
Cost of debt capital is the rate of return expected by the lenders. It is the rate of
interest and debt advance. Therefore cost of debt is equal to the rate of interest payable
on debt (before tax). Interest payable by the company is subject to tax deduction.
Hence, cost of debt before tax should be adjusted for tax effect.
Computation of cost of Debt after tax:
Kda = kd ( 1 t )
Here:
Kd = Cost of Debt before TaxKda = Cost of Debt after Tax
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T = Tax Rate
Kd = 4.5% i.e. the interest rateT = NilThe project is 100% export oriented so the tax is exempted.
Kda = kd ( 1 t )
Kda = 4.5% ( 1 t )
Kda = 4.5%
Weighted Average Cost of Capital (WACC):
In financial decision making, overall cost of capital known as composite cost of
capital is more useful than specific cost of capital. Overall cost of capital is an average
of the cost of each source of funds employed by the company. Weighted average
method is one of the methods of calculating the overall cost of capital.
WACC is the weighted average of the cost of different sources of finance,
weights being attached on the basis of proportion which each source of finance bears to
the total fund. According to ICMA (London) Weighted Average Cost of Capital is the
average cost of companys finance weighted according to the proportion each elementbears to the total pool of capital, weighing is usually based on market valuation current
yields and cost after tax.
Weighted Average Cost of Capital plays an important role in determining the
capital structure, because the optimum capital structure lies at that point where WACC
is minimum. In the evaluation of investment project, WACC is considered to be the
minimum rate of return required from a project so as to enable the firm to pay an
expected rate of return to the investors.
Computation of Overall Cost of Capital
Name Capital Proportion Cost of
Capital After
Tax
WACC
Retained Earnings / Promoters
Contribution
8,54,00,000 37.62% 8% = 0.08 3.00%
Borrowings/Debt 14,16,00,000 62.37% 4.5% = 0.045 2.80%
22,70,00,000 100% 5.80%
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WACC = 5.80%
Computation of Cost of Debt after Tax.
Kda = kd ( 1 t )
Kda = 4.5% ( 1 t )
Kda = 4.5%
Computation of Cost of Retained Earnings.
Kr = Ke ( 1 t ) ( 1 b )
Kr = 8%
Working Note:
1. Calculation of proportion of different sources of capital.
8,54,00,000a. Proportion of Retained Earnings =
22,70,00,000
= 37.62%
14,16,00,000
b. Proportion of Debt =22,70,00,000
= 62.37%
Option II:
The company if totally depends on equity the cost of capital is 8%. Which is
more than WACC.
If the company totally depends upon borrowing the cost of capital is between
8% to 9%, which is again more than the WACC.
Therefore the optimal capital structure is one which has comprises Debt and
Equity. As per the workout the cost of capital is less when the capital structure consists
of different sources, which can be concluded from the above computations.
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5. Human Resource Required:
The machinery used for the production of fragies is fully automatic. It requires
maximum 10 skilled employees to control the machinery. It is estimated that other 35
workers will be needed for packaging and loading of finished product. Therefore the
total workers required are estimated to be 45.
The 10 skilled employees are given special training to handle the machinery.
The expenses incurred for training is 7.5 lakhs. Every year the unit has to incur the
expense of Rs.1.5 lakhs for food hygiene.
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6. Commercial Business:
a. Preparation of Projected Profit and Loss Account
Particulars 30/09/06 30/09/07 30/09/08 30/09/09 30/09/10 30/09/11
IncomeGross Sales - 2369.21 2493.90 2493.90 2493.90 2618.60
Less: Excise Duty - - - - - -
Net Sales - 2369.21 2493.90 2493.90 2493.90 2618.60Expenditures
Raw Materials Consumed - 226.80 226.80 226.80 226.80 226.80
Purchase of traded items - - - - - -
Store spares etc. consumed - - - - - -
Subtotal(A) - 226.80 226.80 226.80 226.80 226.80
Power, Fuel and Water - 184.05 184.05 184.05 184.05 184.05
Repairs and Maintenance - 32.85 32.85 32.85 32.85 32.85
Staff Cost - 37.13 40.84 42.88 42.88 42.88Depreciation and Amortisation - 292.14 248.08 210.73 179.08 152.25
Subtotal(B) - 546.16 505.81 470.51 438.86 412.03
A + B - 772.96 732.61 697.31 665.66 638.83
Opening WIP - - - - - -
Closing WIP - - - - - -
Cost of Goods Produced - 772.96 732.61 697.31 665.66 638.83
Opening Stock of Finished
Goods
- - 38.65 36.63 34.87 33.28
Closing Stock of Finished
Goods
- 38.65 36.63 34.87 33.28 -
Cost of Production - 734.31 731.63 699.08 667.24 672.11
Gross Profit - 1634.89 1759.27 1794.82 1826.66 1946.49
Admin & Selling Exp - 532.00 540.10 540.10 540.10 548.21Interest Cost 28.28 50.90 39.59 28.28 16.97 5.66
Operating Profit (28.28) 1052.00 1179.58 1226.44 1269.59 1392.62
Other Incomes - - - - - -
Profit before Tax (28.28) 1052.00 1179.58 1226.44 1269.59 1392.62
b. Preparation of Cash In Flow Statement.
An analysis of cash flows is useful for short run planning. A firm needs
sufficient cash to pay debt maturing in the near future, to pay interest and other
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expenses and to pay dividend to shareholders. The firm can make projections of cash
inflows and outflows for the near future to determine the availability of cash.
Cash inflow statement for the year 2007
Particulars AmountSales Revenue - 23,69,21,000Less: Operating ExpensesRaw Materials - 2,26,80,000
Power, Fuel and Water - 1,84,05,000Repairs and Maintenance - 32,85,000Staff Cost - 37,13,000Administration - 5,32,00,000Interest Cost - 50,90,000Depreciation - 2,92,14,000PBT - 10,13,34,000
Add: Depreciation - 2,92,14,000Cash In Flow - 13,05,48,000
Cash inflow statement for the year 2008
Particulars AmountSales Revenue - 24,93,90,000Less: Operating ExpensesRaw Materials - 2,26,80,000Power, Fuel and Water - 1,84,05,000Repairs and Maintenance - 32,85,000Staff Cost - 40,84,000Administration - 5,40,10,000
Interest Cost - 39,59,000Depreciation - 2,48,08,000
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PBT - 11,81,59,000
Add: Depreciation - 2,48,08,000Cash In Flow - 14,29,67,000
Cash inflow statement for the year 2009
Particulars AmountSales Revenue - 24,93,90,000Less: Operating ExpensesRaw Materials - 2,26,80,000Power, Fuel and Water - 1,84,05,000Repairs and Maintenance - 32,85,000Staff Cost - 42,88,000Administration - 5,40,10,000
Interest Cost - 28,28,000Depreciation - 2,10,73,000PBT - 12,28,21,000
Add: Depreciation - 2,10,73,000Cash In Flow - 14,38,94,000
Cash Inflow Statement for the Year 2010
Particulars AmountSales Revenue - 24,93,90,000Less: Operating ExpensesRaw Materials - 2,26,80,000Power, Fuel and Water - 1,84,05,000Repairs and Maintenance - 32,85,000Staff Cost - 42,88,000Administration - 5,40,10,000Interest Cost - 16,97,000Depreciation - 1,79,08,000
PBT - 12,71,17,000Add: Depreciation - 1,79,08,000Cash In Flow - 14,50,25,000
Cash Inflow Statement for the Year 2011
Particulars AmountSales Revenue - 26,18,60,000Less: Operating ExpensesRaw Materials - 2,26,80,000
Power, Fuel and Water - 1,84,05,000Repairs and Maintenance - 32,85,000
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Staff Cost - 42,88,000Administration - 5,48,21,000Interest Cost - 5,66,000Depreciation - 1,52,25,000
PBT - 14,25,90,000Add: Depreciation - 1,52,25,000Cash In Flow - 15,78,15,000
C H A R T S H O W IN G E S T IM A T E D A N N U
0
2 0 0 0 0 0 0 0
4 0 0 0 0 0 0 0
6 0 0 0 0 0 0 0
8 0 0 0 0 0 0 0
1 0 0 0 0 0 0 0 0
1 2 0 0 0 0 0 0 0
1 4 0 0 0 0 0 0 0
1 6 0 0 0 0 0 0 0
1 8 0 0 0 0 0 0 0
2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1
Y E A
CASHFLOWSINRS
YE AR
C A S H IN F L
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c. Calculation of Net Present Value.
The reorganization of the time value of money and risk is extremely vital in
financial decision-making. If the timing and risk of cash flows is not considered the
firm may make decisions that may allow it to miss its objectives of maximizing the
owners welfare. The welfare of owners would be maximize when wealth or NPV is
created from making financial decisions.
Time Preference for money:Time Preference for money is an individuals preference for possession of a
given amount of money now, rather than the same amount at some future time. Most
individuals value the opportunity to receive money now higher than waiting for one or
more periods to receive the same amount.
Three reasons to the individuals time preference for money
I. Risk As an individual it is not certain about future cash receipts he/she
prefers receiving cash now.II. Preference for Consumption Preference for consumption over future
consumption of goods and services either because of urgency of their present
wants or because of the risk of not been in a position to enjoy future
consumption.
III. Investment Opportunities Most individuals prefer present cash to future cash
because of available investment opportunities to which they can put present
cash to earn additional cash.
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Required Rate of Return :
The time preference for money is generally expressed by an interest rate. This
rate will be positive in the absence of any risk. It may be therefore called the risk free
rate. The required rate of return may also be called the opportunity cost of capital of
comparable risk.
Present Value:
Present Value of a future cash flow (inflow or outflow) is the amount of current
cash that is of equivalent value to the decision maker. Discounting is the process of
determining present value of a series of future cash flows.
Net Present Value:
Net present value of a financial decision is the difference between the present
value of cash inflows and present value of cash outflows. In the NPV method, aninvestment project is accepted if it has a positive NPV. The project NPV is calculated
by discounting its cash flow by the cost of capital.
Computation of Net Present Value:
Year Cash Inflow Discount Rate @
6%
Present Value of
Cash FlowI. 13,05,48,000 0.943 12,31,06,000
II. 14,29,67,000 0.890 12,72,40,000
III. 14,38,94,000 0.840 12,08,70,000
IV. 14,50,25,000 0.792 11,48,59,000
V. 15,78,15,000 0.747 11,78,87,000
60,39,62,000
Present Value of Cash Flow = 60,39,62,000
Less: Investment = 22,70,00,000
Net Present Value 37,69,62,000
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d. Payback Period
This is traditional method of evaluating the investment project. It is also known
as Pay Off method of Capital Budgeting. Under this method, time required to recover
the original cost of investment through the income, it generates is found out to measure
the suitability of project. In other words, pay back period implies, the number of years
required for capital expenditure to pay for itself. An investment project the cost of
which can be recovered within a shortest period of time can be adjudged to be an ideal
investment project. In order to determine the pay back period, the net income generated
by investment project without depreciation is considered. Net income after chargingtax but before depreciation is determined in order to know the actual cash generated by
a project. Pay back period represents length of time required to recover the original
cost of investment through the cash flows generated by it.
If the cash flow is constant for all the years the pay back period can be
ascertained with the help of following formula.
Cost of InvestmentPay Back Period =
Net Cash Benefits after Tax
The cash inflow of this project is uneven. So the pay back period is calculated
in the following manner.
Computation of Pay Back Period
Cash Inflow Cash Outflow /
Investment
13,05,48,000 22,70,00,000
14,29,67,000 9,64,52,000
14,38,94,000
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14,50,25,000
15,78,15,000
Pay Back Period = 1 Year 8 Month
For Rs. 14,29,67,000 = 12 MonthsFor Rs. 9,64,52,000 = ?
= 9,64,52,000* 12 Months
14,29,67,000= 8 Months
e.Internal Rate of Return:
This is one of the discounted cash flow methods of evaluating investment
projects. It is also known as yield method, marginal efficiency of capital method, time
adjusted rate of return method etc. This method gives time value to money by applying
appropriate discount rate to the future cash flows. Internal rate of return method
attempts to find out present value of streams of net cash inflows resulting from an
investment project to equate with the present value of cash outflows.
An appropriate discount rate cannot be found out at stretch. Internal rate of
return is nothing but the rate of earning of an investment project. It is the discounting
rate which equates present value of total net cash inflows resulting from an investment
proposal with the present value of total cash outflows. If the internal rate of return is
higher than the cut off rate the investment project may be accepted, otherwise rejected.
In case of single investment project, if the internal rate of return is greater than the cut
off rate, the project will be accepted and if it is less than the cut off rate is rejected.
Excess NPV Over Cost Difference Between
IRR = Lower Rate + of Investment * Lower Rate and
Difference Between NPV
Calculate at Higher Rate &
Lower Rate
Higher Rate
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Computation of IRR
Computation of IRR Discount Rate @ 6%
Year Cash Inflow Discount Rate @
6%
Present Value of
Cash Flow
I. 13,05,48,000 0.943 12,31,06,000
II. 14,29,67,000 0.890 12,72,40,000
III. 14,38,94,000 0.840 12,08,70,000
IV. 14,50,25,000 0.792 11,48,59,000V. 15,78,15,000 0.747 11,78,87,000
60,39,62,000
Computation of IRR Discount Rate @ 40%
Year Cash Inflow Discount Rate @
40%
Present Value of
Cash Flow
I. 13,05,48,000 0.714 9,32,11,000
II. 14,29,67,000 1.224 17,49,91,000
III. 14,38,94,000 1.589 22,86,47,000IV. 14,50,25,000 1.849 26,81,51,000
V. 15,78,15,000 2.035 32,11,53,000
1,08,61,53,000
Computation Of IRR Discount Rate @ 50%
Year Cash Inflow Discount Rate @
50%
Present Value of
Cash Flow
I. 13,05,48,000 0.667 8,70,75,516
II. 14,29,67,000 0.444 6,34,77,348III. 14,38,94,000 0.296 4,25,92,624
IV. 14,50,25,000 0.198 2,87,14,950
V. 15,78,15,000 0.133 2,08,31,580
24,26,92,018
Computation of IRR Discount Rate @ 60%
Year Cash Inflow Discount Rate @
60%
Present Value of
Cash FlowI. 13,05,48,000 0.625 8,15,92,500
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II. 14,29,67,000 0.391 5,59,00,097
III. 14,38,94,000 0.244 3,51,10,136
IV. 14,50,25,000 0.153 2,21,88,825
V. 15,78,15,000 0.095 1,49,92,425
20,97,83,983
Investment = 22,70,00,000
Higher NPV Over Investment = 24,26,92,018
Lower NPV Over Investment = 20,97,83,983
Excess NPV Over Cost Difference Between
IRR = Lower Rate + of Investment * Lower Rate and
Difference Between NPV
Calculate at Higher Rate &
Lower Rate
Higher Rate
IRR = 50% + 1,56,92,018 * ( 60 50 )
3,29,08,035
= 50 + 4.76
= 54.76 %
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SWOTSWOT
ANALYSISANALYSIS
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SWOT Analysis
Strength:
1. Assured Market: The Market is assured for final Product. Verwaltung GMBH,
Germany will take the final product.
2. Unique Project: The production of sugar cubes in the shape of ship will be
introduced first time in the market.
3. Availability of Raw Material: Sugar is the raw material for the production of
fragies, which is easily available from the existing sugar factory. The plant will
even not face the shortage of power and water, as it is available from theexisting main plant.
Weakness:
1. Employee Requirement: The employees required should be highly skilled
and trained.
2. Maintenance & Repair: For the maintenance and repair of the machinery
the company has to depend on the contracted company.
Threats:
1. Fluctuation: Fluctuation in the foreign currency is the only threat.
Opportunity:
1. International Market: It is the good opportunity to enter in the International
Market.
2. To Nation: It helps nation to earn foreign currency.
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FINDINGSFINDINGS
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Findings
Profit & Loss Account:
From the estimated profit and loss account it is estimated that the cost of
production will gradually go on decreasing. The production is a