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INTRODUCTION
Financial management is the managerial activity, which is concerned with the
planning and controlling of the firm’s financial resources. It was a branch of economics
till 1890. Till today, it has no unique body of its knowledge of its own, and draws heavily
on economics for its theoretical concepts. Financial management, has an academic
discipline has undergone fundamental changes in its scope and coverage. In the early
years of its evolution it was treated synonymously with the raising of funds.
The subject of financial management is of immense to academicians and
practicing managers. Financial management emerged as a distinct field of study at turn of
the 20th century. Its evolution may be divided into boar phase- the traditional phase, the
transaction phase and the modern phase. The traditional phase lasted for about four
decades. It is of great interest to academicians because the subject is still developing, and
there are still certain areas where controversies exit for which no unanimous solution
have been reached yet practicing managers are interested in this subject because among
the most crucial decisions of the firm are those which related to finance and an
understanding of the theory of financial management provides them with conceptual and
analytical insights to make those decisions skillfully.
Financial management in the small firm is characterized, in many different
cases, by the need to confront a somewhat different set of problems and opportunities
than those confronted by a large corporation. One immediate and obvious difference is
that a majority of smaller firms do not normally have the opportunity to publicly sell
issues of stocks or bonds in order to raise funds.
The owner-manager of a smaller firm must rely primarily on trade credit,
bank financing, lease financing, and personal equity to finance the business. One
therefore faces a much more severely restricted set of financing alternatives than those
faced by the financial vice president or treasurer of a large corporation. One area of
particular concern for the smaller business owner lies in the effective management of
working capital.
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Net working capital is defined as the difference between current assets and
current liabilities and is often thought of as the "circulating capital" of the business. Lack
of control in this crucial area is a primary cause of business failure in both small and large
firms.
Firms create manufacturing capacities for production of goods, some provide
services to customers. They sell their goods or services to earn profit. They raise funds to
acquire manufacturing and their facilities. Thus, the three most important activities of a
business firm are:
Production
Marketing
Finance
A firm secures whatever capital it needs and employees it in financial
activities which generate returns on invested capital. Financial management is broadly
concerned with the acquisition and use of funds by a business firm. In other words,
finance management is planning, directing, monitoring, organizing, and controlling of the
monetary resources of an organization.
Scope of financial management is vast and important to business. It is
involve in all level of management and all fields of human activities. We can prove that
without good financial management, no organization can be alive. Organization selfish
group of is helpful for people and wants welfare of public. But, it need fund, money and
cash and for getting it, it uses techniques of financial management. Hence financial
management makes its place everywhere. Never understand it as the name of book but it
is practical science to support business to live respectful life in society.
Financial Planning
It is the duty of management to ensure the adequate funds are available to
meet the needs of the business. In the short term, funds are required to pay the employers
or to invest in stocks. In the middle and long term funds are required to make additions to
the productive capacity of the business.
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Financial Control
Financial control helps the business to ensure that it is meeting its goals.
Through financial control the firm decides how much to invest in short term assets and
how to raise the required funds.
Financial Decision Making
The three primary aspects of financial decision making are investment,
financing and dividends. Investment must be financed in some way for which various
alternatives is available. A financing decision is to retain the profits earned by the
business or should it should be distributed among the shareholders via dividends.
Finance is one of the most important aspects of business management.
Without proper financial planning a new enterprise is unlikely to be successful. Managing
money is essential to ensure a secure future, both for the individual and an organization.
It may be difficult to separate the finance functions from production, marketing and other
functions but the function themselves can be readily identified. Thus, finance functions
include:
Long term assets mix or investment decisions.
Capital mix or financing decisions.
Profit allocation or dividend decisions.
Assort term asset mix or liquidity decisions
A firm performs finance functions simultaneously and continuously in the
normal course of the business.
Investment Decisions
A firm’s investment decisions involve capital expenditures. They are,
therefore, referred as a capital budgeting decisions.
Two important aspects of investment decisions:
The evaluation of the prospective profitability of new investments.
The measurement of a cut of rate against that the prospective return of an
investment could be compared.
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Financing Decisions
Financing decisions is the second important function to be performed by the
financial manager, broadly, he or she must decide, when, where firm and how to acquire
funds to meet the firm’s investment needs. The mix of debt and equity is known as the
firm’s capital structure. The financial manager must strive to obtain to best financing mix
or the optimum capital structure for the firm.
Dividend decisions
Dividend decision is the third major financial decision. The financial
manager must decide whether the firm should distribute all profits, or retain them, or
distribute a portion and retained balance. The proportion of profits distributed as
dividends is called dividend payout ratio and the retained portion of profits is known as
the retention ratio.
Liquidity Decisions
Investment in current assets affects the firm’s profitability and liquidity.
Current assets management that affects a firm’s liquidity is yet another important finance
functions. Current assets should be managed efficiently for safeguarding the firm against
the risk of liquidity. Lack of liquidity in extreme situations can lead to the firm’s
insolvency.
The field of capital budgeting is both comprehensive and challenging. It is clearly
plays a vital role in assigning most business firms to achieve there various goals (e.g.,
profitability, growth, stability, risk reduction, social goals, etc) it has been closely allied
to the economic problem. This is rather broadly defined as the allocation of scarcer
resources among competing alternatives.
Capital budgeting may be defined as the planning, evaluation and selection of
capital expenditure proposal as distinguished from operating year, capital expenditures
represent outlay whose principal benefits will be recognized over longer period of time.
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Decision relating to capital expenditures as opposed to those for operating expenditures,
are generally irreversible and they require careful selection techniques and procedures.
WHAT IS CAPITAL BUDGETING?
Capital budgeting is a required managerial tool. One duty of a financial manager is
to choose investments with satisfactory cash flows and rates of return. Therefore, a
financial manager must be able to decide whether an investment is worth undertaking and
be able to choose intelligently between two or more alternatives. To do this, a sound
procedure to evaluate, compare, and select projects is needed. This procedure is called
capital budgeting.
DEFINITION OF CAPITAL BUDGETING
Capital budgeting includes are those expenditure which are expected to produce
benefits to the firm over more than one year, and encompasses both tangible and
intangible assets. Many companies follow the traditional benefits occurring only the
expenditure on tangible fixed assets.
“Capital budgeting involves the process of planning expenditure whose returns are
expected to extend beyond one year”.
-Weston & Brigham
“Capital budgeting is long term planning for making and financing proposed
capital outlay”.
-Charles T.Horngeren
FEATURES OF CAPITAL BUDGETING DECISION:
Potentially large anticipated benefits.
A relatively high degree of risk.
A relatively long time period between the initial outlay and the anticipated returns.
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SIGNIFICANCE OF THE STUDY
1. Studies of this type are useful to the management, employees, suppliers and society.
2. Studies of this type are useful to the research scholars who conduct in depth
3. Research. Studies of this type are useful to the similar organization in assessing the
financial position
4. The study has great significance and provides benefits to various parties whom
directly or indirectly interacts with the company.
5. It is beneficial to management of the company by providing crystal clear picture
regarding important aspects like liquidity, leverage, activity and profitability.
6. The study is also beneficial to employees and offers motivation by showing how
actively they are contributing for company’s growth.
7. The investors who are interested in investing in the company’s shares will also get
benefited by going through the study and can easily take a decision whether to invest or
not to invest in the company’s shares.
6
OBJECTIVES OF THE STUDY
The following are the objectives of the study
1. To present theoretical framework relating to capital budgeting
2. To evaluate the effectiveness of capital expenditure decisions of company.
3. To provide support in order to accomplished the over all goal of the capital
budgeting system of the company
4. To evaluate the elements consider by the of the company expansion project.
5. To offer findings, suggestions & conclusion based on the study.
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LIMITATIONS OF THE STUDY
The following the limitations of the study:
1. The project has to be completed with the available data given to us.
2. The period of study that is 6 weeks is not enough to conduct study of the project
3. The study is carried basing on the information and documents provided by the
organization
4. There was no scope of gathering current information, as the auditing has not been
done by time of project work.
5. The procedure has to be completed with the available data with us.
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METHODOLOGY OF THE STUDY
The study carried with the co-operation of the management who permitted to carry
on the study and provided the requisite data. The data is collected from the following
sources.
SOURCES OF DATA
1. Primary Data
2. Secondary Data
PRIMARY DATA:
Interviewing a few financial department heads. Officers and management bodies
and staff members of the company form part of primary data.
SECONDARY DATA:
The information collected from
1. Annual report.
2. Executive and staff of financial accounting department.
3. Executives of other departments.
DIAGRAMATIC REPRESENTATION OF RESEARCH METHODOLOGY
9
DATA SOURCES
PRIMARY SOURCES
SECONDARYSOURCES
MANAGEMENT RESPONDENTS
PERSONAL OBSERVA NCE
INSIDE THE
COMPANY
OUT SIDE THE
COMPANY
ANNUALREPORTS
TEXT BOOKS
JOURNALS
INDUSTRY PROFILE
Today, India is ‘The Oyster” of the global dairy industry. It offers opportunities
galore to entrepreneur’s world wide, who wish to capitalize on one of the world’s largest
and fastest growing markets for milk and milk products. A bagful of ‘pearls’ awaits the
international dairy processor in India. The Indian dairy industry is rapidly growing, trying
to keep pace with the galloping progress around the world. As he expands his overseas
operation to India many profitable options await him. He may transfer technology, sign
joint ventures or use India as a sourcing center for regional exports. The liberalization of
the Indian economy beckons to MNC’s and foreign investors alike.
India’s dairy sector is expected to triple its production in the next 10 years in view
of expanding potential for export to Europe and the West. Moreover with WTO
regulations expected to come into force in coming years all the developed countries
which are among big exporters today would have to withdraw the support and subsidy to
their domestic milk products sector. Also India today is the lowest cost producer of per
liter of milk in the world, at 27 cents, compared with the U.S’s 63 cents, and Japan’s $2.8
dollars. Also to take advantage of this lowest cost of milk production and increasing
production in the country multinational companies are planning to expand their activities
here. Some of these milk producers have already obtained quality standard certificates
from the authorities. This will help them in marketing their products in foreign countries
in processed form.
The urban market for milk products is expected to grow at an accelerated pace of
around 33% per annum to around Rs.43,500 Crores by year 2005. This growth is going to
come from the greater emphasis on the processed foods sector and also by increase in the
conversion of milk into milk products. By 2005, the value of Indian dairy produce is
expected to be Rs.10,00,000 Million. Presently, the market is valued at around Rs.7,
00,000 Million.
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Background:
India with 134mn cows and 125mn buffaloes has the largest population of cattle in
the world. Total cattle population in the country as on October’00 stood at 313mn.
More than fifty percent of the buffaloes and twenty percent of the cattle in the
world are found in India and most of these are milk cows and milk buffaloes.
Indian dairy sector contributes the large share in agricultural gross domestic
products. Presently there are around 70,000 village dairy cooperatives across the country.
The co-operative societies are federated into 170 district milk producers unions, which is
turn has 22-state co-operative dairy federation. Milk production gives employment to
more than 72mn dairy farmers. In terms of total production, India is the leading producer
of milk in the world followed by USA. The milk production in 1999-00 is estimated at
78mn MTas compared to 74.5mn MT in the previous year. This production is expected to
increase to 81mn MT by 2000-01 of this total produce of 78mn cows’ milk constitute
36mn MT while rest is from other cattle.
While world milk production declined by 2 percent in the last three years,
according to FAO estimates, Indian production has increased by 4 percent. The milk
production in India accounts for more than 13% of the total world output and 57% of total
Asia’s production. The top five milk producing nations in the world are India, Russia,
Germany and France.
Although milk production has grown at a fast pace during the last three decades
(Courtesy: Operation Flood), milk yield per animal is very low. The main reasons for the
low yield are
Lack of use of scientific practices in milking
Inadequate availability of fodder in all seasons.
Unavailability of veterinary health service
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TABLE 2.1MILK YIELD COMPARISON
Country Milk Yield(Kgs per year)
USA 7002
UK 5417
Canada 5348
New Zealand 2976
Pakistan 1052
India 795
World (Average) 2021
Source: Export prospects for agro-based industries, World Trade Centre, Mumbai.
Production of Milk in India:year Production in MT
1998-99 48.4
1999-00 51.4
2000-01 53.7
2001-02 56.3
2002-03 58.6
2003-04 61.2
2004-05 63.5
2005-06 65.0
2006-07 68.5
2007-08 70.8
2008-09 74.7
2009-2010(E) 78.1
2010-2011(T) 81.0
E = Estimated T = Target/ Expected
Source: DEPI, Annual Report – 2009-2010
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World’s major milk producers:
(Million MTS)
country 2009-10 2010-11(Approx.)
India 74.5 74.5
USA 71 79.3
Russia 34 33
Germany 27 28.5
France 24 24.2
Pakistan 21 22
Brazil 21 27
UK 14 14
Ukraine 15 14
Poland 12 12
New Zealand 11 12
Netherlands 11 11
Italy 10 10
Australia 9 10
Operation Flood:
The transition of the Indian milk industry from a situation of net import to that of
surplus has been led by the efforts of National Dairy Development Board’s Operation
Flood. Program under the aegis of the former Chairman of the board Dr.Kurien.
Launched in 1970, Operation Flood has led to the modernization of India’s dairy
sector and created a strong network for procurement processing and distribution of milk
by the co-operative sector. Per capita availability of milk has increased from 132 gm per
day in 1950 to over 220 gm per day in 2007.
The main thrust of Operation Flood was to organize dairy cooperatives in
the milk shed areas of the village, and to link them to the fourth Metro cities, which are
the main markets for milk. The efforts undertaken by NDDB have not only led to
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enhanced production, improvement in methods of processing and income generation in
the rural areas. It has also led to an improvement in yields, longer lactation periods,
shorter calving intervals, etc through the use of modern breeding techniques.
Establishment of milk collection centers and chilling centers has enhanced life of raw
milk and enabled minimization of wastage due to dairy development programmed and
looking at the success achieved in India by adopting the co-operative route, a few other
countries have also replicated the model of India’s White Revolution.
ADVANTAGES OF INDIAN DAIRY INDUSTRY
In terms of total bovine population, India occupies the first position on the world,
with 176.7 million cattle and buffaloes. (World’s total bovine population is 1,420
million). A large bovine population, strong procurement infrastructure, presence of highly
skilled manpower, cheaper labor, and a large number of processing and allied facilities
are some of the advantages that the India dairy business has.
PRODUCTION TRENDS
Production of milk rose from 20.7 million tonnes in 2006-07 to 8.3 million tonnes in
2007-08. However, 45 per cent of the total milk is still handled by the traditional sector.
In 2006, 77 million buffaloes produced about 50 percent of the total milk production in
the country. In the same year, about 200 million cows produced about 45 per cent of the
total milk production. (Nearly 156 million goats, sheep etc produce only about 5 per cent
of the total milk output.)
EXPORT POTENTIAL
India is not fully utilizing its export potential in respect of dairy products. The cost
of milk production in India is the lowest. And the dairy industry is not getting any
subsidy. There is an urgent need to pay special attention to quality of India has to
compete with other countries.
At present, the country is exporting malted milk foods, ghee, butter and cheese to
countries like Bangladesh, UAE, Nepal, Sri Lanka, Oman and Bahrain. Of course world
milk prices are subject to dramatic fluctuations. Export earnings from the live stock sector
and related products rose to Rs.19, 250 million in 2007-2008 from Rs. 7,920 million in
2006-07.
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DISAPPOINTING FACTS
Milk availability in India is still low at 212 grams/day per person. Of course, the per
capita availability of milk in the rural areas is barely 121 grams/day as compared to 400
grams/day in urban areas. Animal productivity remain low, as the national average is
only 1.5 litres/day. Productivity of Indian cattle is 10 per cent of the productivity of cattle
in Israel and 30 per cent of the level achieved by the developed countries. Unless milk
productivity is raised, it is difficult to compete with Europe, America and Occeania.
What is more, only 10 per cent of the milk produced is in the organized sector,
leaving the remaining portion in the hands of milkmen thus providing chances for
adulteration and exploitation. Also, our cattle and buffaloes are slow maturing, show
irregular cycling behavior, produce fewer claves in their life-time, and suffer from
physical and physiological anomalies in reproduction.
There is a serious shortage of conventional feeds for feeding livestock. Both
quantitatively and qualitatively, there exists a wide gap in demand and availability of
fodder resources in India. During the last two decades, there has been no change in the
cultivated area devoted to fodder. It still stands at 4.4 per cent of the total cropped area. It
is estimated that 10 to 15 per cent increases can be recorded in the existing milk
production through adequate feeding of bovine population.
STEPS TAKEN SO FAR
The problem of low productivity of animals can be solved by ensuring availability of
feed and fodder. Concrete efforts are needed to improve the productivity of fodder crops,
develop grazing land, and promote agro-forestry systems like silvipasture and research on
low-cost feed items.
Extensive research has been carried out to find out the utility of items like apple pomace,
ground nut hulls, mesta cake, neem cake, salseed meal, soya pulp, rice bran and brewery
waste.
On June 9, 1992, the Govt., of India issued an order under section 3 of the essential
commodities Act, 1955. According to this order, known as Milk and Milk Products Order
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(MMPO) 1992, milk does not have to mean just cow or buffalo milk, it could also be goat
milk or even a mixture of the three. The various objectives of MMPO include:
Facilitating supply or availability of milk by balancing uneven supplies in
different regions.
Maintenance and increase of milk production and supplies and ensuring equitable
distribution.
Establishment of proper standards and norms for control in handling milk and milk
products.
Establishment, promotion or registration of any industry related to milk or milk
products.
Such other objectives incidental to the effective implementation of the MMPO.
The milk unions are urging the government to either ban OGL imports of skimmed milk
powder (SMP) or impose duty on the same. They argue that prices of imported powder
should be at par with those of the domestic products. The price of skimmed milk
powder is coming down under pressure from imports. It is said that levying of minimum
import duty of 35 per cent of SMP would provide a level playing field to the producers.
(India gets about 5,000 tonnes of imported milk powder annually).
LATEST DEVELOPMENT IN THE DAIRY SECTOR
Formation of new dairy Co-operatives in Operation flood areas to bring 3.5
million members under the Co-operative fold in addition to the 9 million members
now being served by dairy Co-operatives.
Providing vocational opportunities and fostering entrepreneurship among dairy-
science student trainees to equip them with knowledge and experience so that they
may take up dairying as a profession.
TOP MOST PRIORITY
In the livestock sector, productivity holds the key. The major thrust should be on
genetic up gradation to improve productivity and production. Of course, priority
should be given to infrastructure development, feed management and better health
care services.
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CURRENT SCENARIO
Of the total milk output, the organized sector still handles an estimated output of
12% only, despite vigorous dairy development activities. At present there are 25.2
dairy plants in the public and Co-operative sectors including pilot dairies with an
average output of 12.2 million litres. The milk market covers 528 major towns, 4
metros and 149 class one and 375 smaller towns.
About 300 million supply every day. The milk production enhancement units are
being adequately strengthened. The Indian of Agriculture Research and the “National
Dairy Development Board” are mounting massive efforts to integrate dairy science
research, education, extension and development.
Federation that was guided by “National Co-operative Dairy Federation of India”
the apex body of milk Co-operative societies. A nation wide network system of
“Multi tier producers Co-operative” which are domestic in structural and are
professionally managed has been established. At present this programme is providing
a joint additional income of Rs. 1200 crores from milk. It is heartening to note that the
Dairy equipment industry has grown to such an extent that most of Dairy Industry
needs are met indigenously.
TECHNOLOGY MISSION
The operation flood programme prepared the ground for launching another
massive programme at the national level called “Technology Mission on Dairy
Development (TMDD) on June 11, 1988. The main objective us to accelerate the pace
of growth of dairy industry in India.
To achieve this end, the operation flood programmes such as the dairy research
programmes processing technology and product manufacturing etc. the mission
operation areas has covered approximately 60% of the country by 1995. The mission
will functions through the adoption of locating specific strategies such as people’s
participation, demonstration of excellence, better land management cost effective
handling and processing system and intensive marketing.
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DAIRY PROCESSION TECHNOLOGY
Research studies in dairy technology in NDRI Karnal have led to the
development of purely vegetarian processed cheese, a synthetic ghee flavor and Ghee
making plant on the principle of Hydrodynamics and Heat transfer in horizontal thin
scalped surface heat exchanges with a capacity to handle 500-600 kg an hour of
creamy butter. A two-fold increase in shelf life in cheese was attained. The methods
of manufacturing grikhand cheese spreads of various flavors etc., have been
successfully developed by NDDB.
Per Capita availability of milk:
Year Gm / day
1960 127
1968 113
1973 111
1980 128
1990 178
1992 192
2005 198
2006 200
2007 202
2008 203
2009 212
2010 E 225
2011 P 250
E = Estimated P = Provisional
Fresh milk:
Over 50% of the milk produced in India is buffalo milk. And 45% is cow milk.
The buffalo milk contribution to total milk produce is expected to be 54% in 2000.
buffalo milk 3.6% protein, 7.4% fat, 5.5% sugar, 0.8% ash and 82.7% water where as
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cow milk has 3.5 protein, 3.7% fat, 4.9% milk sugar, 0.7% ash and 87% water. While
presently (for the year 2000) the price of buffalo milk is ruling at $261 – 313 per MT that
of cow is ruling $170-267 per MT. fresh pasteurized milk is available in packaged from.
However, a large part of milk consumed in India is not pasteurized, and is sold in loose
form by vendors. Sterilized milk is scarcely available in India.
Packaged milk can be divided according to fat content as follows.
Whole (full cream) Milk – 6% fat
Standardized (toned) milk -4.5% fat
Doubled toned (low fat) Milk – 3 % fat
Another category of milk, which has a small market is flavored milk.
1. THE INDIAN MARKET – A PYRAMID:
Consumer Habits and Practices
Milk has been an integral pat of Indian food for centuries. The par capital
availability of milk in India has grown from 172 gm per person per day in 1972 to 182
gm in 1992 and 203 gm in 1988-2008. This is expected to increase to 212 gms for 2008-
09. However, a large part of the population cannot afford milk. At this per capita
consumption it is below the world average of 285 gm and even less than 220 gm
recommended by the Nutritional Advisory Committee of the Indian Council of Medical
Research.
There are regional disparities in production and consumption also. The per capita
availability in the north is 278gm, west 174gm, south 148gm and in the east only 93 gm
per person per day. This disparity is due to concentration of milk production in some
pockets and high cost of transportation. Also the output of milk in cereal growing areas is
much higher than elsewhere which can be attributed to abundant availability of fodder,
crop residues, etc which have a high food value for milk animals. In India about 46% of
the total milk produced is consumed in liquid form and 47% us converted into traditional
products like cottage butter, ghee, punier, khoya, curd, Malay, etc. only 7% of the milk
goes into the production of western products like milk powders, processed butter and
processed cheese. The remaining 54% is utilized for conversion to milk products. Among
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the milk products manufactured by the organized sector some of the prominent ones are
ghee, butter, cheese, ice creams, milk powders, malted milk food, condensed milk
infant’s foods etc of these ghee alone accounts for 85%.
It is estimated that around 20% of the total milk produced in the country is
consumed at producer-household level and remaining is marketed through various
cooperatives, private dairies and vendors. Also of the total produce more than 50% is
produced by cooperatives and other private dairies.
While for cooperatives of the total milk produced 60% is consumed in fluid form
and rest is used for manufacturing processed value added dairy products; for private
dairies only 45% is marketed in fluid form and rest is processed into value added products
like ghee, makhan etc.
Still, several consumers in urban areas prefer to buy loose milk from vendors due
to the strong perception that loose milk is fresh. Also a current level of processing and
packaging capacity limits the availability of packaged milk.
The preferred dairy animal in India is buffalo unlike the majority of the world
market, which is dominated by cow milk. As high as 98% of milk is produced in rural
India, which caters to 72% of the total population, whereas the urban sector with 28%
population consumes 56% of total milk produced.
Even in urban India, as high as 83% of the consumed milk comes from the
unorganized traditional sector. Presently, only 12% of the milk market is represented by
packaged and branded pasteurized milk, valued at about Rs.8,000 crores. Quality of milk
sold by unorganized sector however is inconsistent and o is the price across the season in
local areas. Also these vendors add water and caustic soda, which makes the milk
unhygienic.
India’s dairy market is multi-layered. It’s shaped like a pyramid with the base
made up of a vast market for low-cost milk. The bulk of the demand for milk is among
the poor in urban areas whose individual requirement is small, may be a glassful for use
20
as whitener for their tea and coffee. Nevertheless, it adds up to a sizable volume –
millions of liters per day.
In the major cities lies an immense growth potential for the modern sector.
Presently, barely 778 out of 3,700 cities and towns are served by its milk distribution
network, dispensing hygienically packed wholesome, quality pasteurized milk. According
to one estimate, the packed milk segment would double in the next five years, giving both
strength and volume to the modern sector. The narrow tip at the top is a small but affluent
market for western type milk products.
3. Emerging Dairy Markets:
Food service institutional market: it is growing at double the rate of consumer
market.
Defense market: An important growing market for quality products at reasonable
prices.
Ingredients market: A boom is forecast in the market of dairy products used as
raw material in pharmaceutical and allied industries.
Parlor market: The increasing away - from - home consumption trend opens
new vistas for ready - to - serve dairy products which would ride piggyback on
the fast food revolution sweeping the urban India.
India, with her sizable dairy industry growing rapidly and on the path of modernization,
would have a place in the sun of prosperity for many decades to come.
The one index to the statement is the fact that the projected total milk output over the
next 15 years (1995 - 2010) would exceed 1457.6 million tones which is twice the total
production of the past 15 years!
Penetration of milk products:
Western table spreads such as butter, margarine and jams are not very popular in
India. All India penetration of butter / margarine is only 4%.This is also largely
represented by urban area, where penetration is higher at 9%. In rural areas, butter /
margarine have penetrated in 2.1% of households only. The use of these products in the
large metros is higher, with penetration at 15%.
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Penetration of cheese is almost nil in rural areas and negligible in the urban areas.
Per capita consumption even among the cheese - consuming households is a poor 2.4kg
pa as compared to over 20kg expensive products and also non - availability in many parts
of the country Butter, margarine and cheese products are mainly manufactured by
organized sector. Similarly, penetration of ghee is highest in medium sized towns at
37.2% compared to 31.7% in all urban areas and 21.3% in all rural areas.
The all India penetration of ghee is 24 1%. In relative terms, penetration of ghee is
significantly higher in North accounts for 57% of ghee consumption and west for 23%. A
large part of ghee is made at home and by small / cottage industry form milk. The relative
share of branded products in this category is very low at around 1-2%.
Milk powder and condensed milk have not been able to garner any significant
consumer acceptance in India as indicated by a very low 4.7% penetration. The
penetration is higher at 8.1% in urban areas and lower at 3.5% in rural areas. Within
urban areas, it is relatively higher in medium sized towns at 8.5% compared to 7.7% in
large metros.
Market Size and Growth:
Market size for milk (sold in loose / packaged form) is estimated to be 36mnMT
valued at Rs 470bn. The market is currently growing at round 4%pa in volume terms. The
milk surplus states in India are Uttar Pradesh, Punjab, Haryana, Rajasthan, Gujarat,
Maharasthra, Andhra Pradesh, Karnataka and TamilNadu, the manufacturing of milk
products is concentrated in these milk surplus States.
Milk production grew by a mere 1% pa between 1947 and 1970. Since the early
70’s, under Operation Flood, production growth increased significantly averaging over
5% pa. About 75% of milk is consumed at the household level which is not a part of
commercial dairy industry Loose milk has a larger market in India as it is perceived to be
fresh by most consumers. In reality however, it poses a higher risk of adulteration and
contamination.
22
The production of milk products, i.e. milk products including infant milk food,
malted food, condensed milk & cheese stood at 3.07 lakh MT in 2009, whereas that of
malted food is at 65000MT. Cheese and condensed milk production stands at 5000 and
11000 MT respectively in the same year.
(Source: Annual Report 2009-2010, DEPI)
Major Players:
The packaged milk segment is dominated by the dairy cooperatives. Gujarat Co-
operative Milk Marketing Federation (GCMMF) is the largest player. All other local
dairy cooperatives have their local brands (For e.g. Gokul, Warana in Maharashtra, Saras
in Rajasthan, Verka in Punjab, vijaya in Andhra Pradesh, Aavin in Tamil Nadu, etc).
Other private players include J K Dairy, Heritage Foods, Indiana Dairy, Dairy Specialties,
etc Amrut Industries, once a leading player in the sector has turned bankrupt and is facing
liquidation.
3. EXPORT POTENTIAL:
India has the potential to become one of the leading players in milk and milk
product exports. Lavational advantage: India is associated amidst major milk deficit
countries in Asia Africa. Major importers of milk and milk products are Bangladesh,
China, Hong Kong, Singapore. Thailand, Malaysia, Philippines, Japan, UAE, Oman and
other gulf countries, all located close to India.
Low Cost of Production:
Milk production in scale insensitive and labor intensive. Due to low labor cost,
cost of production of milk is significantly lower in India. Concerns in export
competitiveness are
Quality:
Significant investment has to be made in milk procurement, equipments, chilling
and refrigeration facilities. Also, training has to be imparted to improve the quality to
bring it up to international standards.
23
Productivity:
To have an exportable surplus in the long-term and also to maintain cost
competitiveness, it is imperative to improve productivity of Indian cattle.
There is a vast market for the export of traditional milk products such as ghee,
paneer, shrikhand, rasgolas and other ethnic sweets to the large number of Indians
scattered all over the world.
India's exports of milk products:
Description
(Quantity, M.T:
Value, Rs.
Million)
2006-07 2007-08 2008-09
Quantity Value Quantity Value Quantity Value
Skimmed milk
powder
4,638.620 335 320 282.700 19.640 5.000 0.375
Milk and milk
food for babies
8.270 2.019 111.370 4,270 11.000 2.020
Milk cream 332.230 28 040 1.000 0.084-
-
Sweetened
condensed milk
41.730 2.840 9.220 0.970 60.390 7.220
Whey 78.460 3.750 11.500 1.010 6.000 0.342
Ghee / Butter /
Butter oil
7,895.080 431.10 299.970 19.20 452.080 238950
India is a land of opportunity for investors looking for new and expanding markets.
Dairy food processing holds immense potential for high returns Growth prospects in the
dairy food sector are termed healthy, according to various studies on the subjectThe basic
infrastructural elements for a successful enterprise are in place.
24
• Key elements of free market system
• Raw material (Milk) availability
• An established infrastructure of technology
• Supporting manpower
An entrepreneur's participation is likely to provide attractive returns on the
investment in a fast growing market such as India, along with an export potential in the
Middle East, Singapore, Malaysia, Indonesia, Korea, Thailand, Hong Kong and other
countries in the region. Among several areas of potential' participation by NRI's and
foreign investors. The following list outlines a few promising opportunities:
Biotechnology:
Dairy cattle breeding of the finest buffaloes and hybrid cows
Milk yield increase with recombinant somatotropin
Recombinant chymosin, acceptable to vegetarian consumers
Dairy cultures, probiotics, dairy biologies, enzymes and coloring materials for
food processing
Fermentation derived foods and industrial products alcohol, citric acid, lysine, flavor
preparations, etc.
Biopreservative ingredients based on dairy fermentation, viz., Nisin, Pedicoccin,
Acidophilin, Bulgarican contained in dairy powders.
Dairy / food processing equipment:
Potential exists for manufacturing and marketing of cost competitive food processing
machinery of world - class quality.
Food packaging equipment:
Opportunities lie in the manufacturing of both machinery and packaging materials that
help develop brand loyalty and a clear edge in the marketing of dairy foods.
25
Distribution channels:
For refrigerated and frozen food distribution, a world class cold chain would help in
providing quality assurance to the consumers around the region.
Retailing:
There is scope for standardizing and upgrading food retailing in major
metropolitan cities to meet the shopping needs of a vast middle class. This area includes
grocery stores of European and North American quality, warehousing and distribution.
4. PRODUCT DEVELOPMENT:
Dairy foods can be manufactured and packaged for export to countries where
Indian food enjoys basic acceptance. The manufacturing may be carried out in contract
plants in India. An option to market the products in collaboration with local
establishments or entrepreneurs can also be explored, products exhibiting potential
include typical indigenous dairy foods either not available in foreign countries or
products whose authenticity may be questionable. Gulabjamuns, Burfi, Peda,
Rasagollas, and a host of other Indian sweets have good business prospects.Products
typically foreign to India but indigenous to other countries could also be developed for
export. Such products can be manufactured in retail package sizes and could be produced
from milk of sheep, goats and camel. Certain products are characteristically produced
from milk of a particular species.
For example, Feta cheese is used in significant tonnage, in Iran. Sheep milk is
traditionally used for authentic Feta cheese. Accordingly, India's goat and sheep herds can
be utilized for the manufacture of such authentic products.
Ingredient manufacture:
Export markets for commodities like dry milk, condensed milk, ghee and certain
cheese varieties are well established. These items are utilized as ingredients in foreign
26
countries. These markets can be expanded to include value - added ingredients like
aseptically packaged cheese sauce and dehydrated cheese powers
* Cheese sauce
* Canned cheese sauce is made from real cheese to which milk, whey, modified food
starch, vegetable oil, colorings and spices may be added. Cheese sauce is useful in
kitchens for the preparation omelet, sandwiches, entrees, and soups. In addition, cheese
sauce is used as a topping on dishes.
* Cheese powders:
cheese powders are formulated for dusting or smearing of popular snacks like
potato chips, crackers, etc. they impart flavor and may be blended with spices.With the
globalization of food items, an opportunity should open up for food service and
institutional markets.
Indian (traditional) Milk used Products:
There are a large variety of traditional Indian milk products such as
MAKKHAN - UNSALTED BUTTER GHEE - BUTTER OIL PREPARED
BYHEAT CLARIFICATION, FOR LONGER SHELF LIFE
KHEER - A SWEET MIX OF BOILED MILK, SUGAR AND RICE
BASUNDI - MILK AND SUGAR BOILED DOWN TILL IT THICKENS
RABRI - SWEETENED CREAM
DAHI - A TYPE OF CURD
LASSI - CURD MIXED WITH WATER AND SUGAR / SALT
CHANNA - MILK MIXED WITH LACTIC ACID TO COAGULATE.
KHOA - EVAPORATED MILK. USED AS A BASE TO PRODUCE
SWEET MEATS
The market for indigenous based milk food products is difficult to estimate as most of
these products are manufactured at home or in small cottage industries catering to local
areas. Consumers while purchasing dairy products look for freshness, quality, taste and
texture, variety and convenience.
27
Products like Dahi and sweets like Kheer, Basundi, Rabri are perishable products
with a shelf life of less than a day. These products are therefore manufactured and sold by
local milk and sweet shops. There are several such small shops within the vicinity of
residential areas Consumer loyalty is built by consistent quality, taste and freshness.
Branding of Traditional Milk Products:
Among the traditional milk products, ghee is the only product which is currently
marketed, in branded form. Main ghee brands are Sagar, MilkMan (Britania), Amul
(GCMMF), Aarey (Mafco Ltd), Vijaya (AP Dairy Development Cooperative Federation),
Verka (Punjab Dairy Cooperative). Everyday (Nestle) and Farm Fresh (Wockhardt). With
increasing urbanization and changing consumer preferences, there is possibility of large
scale manufacture of indigenous milk products also The equipments in milk
manufacturing have versatility and ca be adapted for several products for instance,
equipments used to manufacture yogurt also can be adapted for large scale production of
Indian curd products (dhai and lassi). Significant research work has been done on dairy
equipments under the aegis of NDDB.
GCMMF has also made a beginning in branding of other traditional milk products
with the launch of packaged Paneer under the Amul brand. It has also created a new
umbrella brand “Amul Mithaee'', for a first new product Amul Mithaee Gulabjamun has
already been launched in major Indian markets.
Western Milk Products:
Western milk products such as butter, cheese, and yogurt have gained popularly in
the Indian market only during the last few years. However consumption has been
expanding with increasing urbanization.
Butter:
Most Indians prefer to use home made white butter (Makkhan) for reasons of taste
and affordability. Most of the banded butter is sold in the towns and cities. The major
brands are Amul is the leading national brand while theother players have greater shares
in their local markets. The latest entrantin the butter market has been Britannia. Britannia
has the advantages of a widedistribution reach and a strong brand recall. Priced at par
28
with the Amulbrand, it is expected to give stiff competition to the existing players. In
2009-2010 the butter production is estimated at 4 purposes rest all is in the yellow form.
Cheese:
The present market for cheese in India is estimated at about 9.000 tonnes and is
growing at the rate of about 15% per annum. Cheese is mainly consumed in the urban
areas. The four metro cities alone account for more than 50% of the consumption.
Mumbai is the largest market (accounting for 30% of cheese sold in the country),
followed by Delhi (20%), Calcutta (7%) and Chennai (6%). Mumbai has a larger number
of domestic consumers, compared to Delhi where the bulk institutional segment (Mainly
hotels) is larger.
Demand for various types of cheese in the Indian market:
Type of Cheese % of total consumption
Processed 50
Cheese spread 30
Mozzarella 10
Flavored / Spiced 5
Others 5
The major players are Amul, Britannia, and Dabon international dominating the
market. Other major brands were Vijaya, Verka and Nandini (all brands or various
regional dairy cooperatives) and Vadilal. The heavy advertising and promotions being
undertaken by these new entrants is expected to lead to strong 20% growth in the
segment. Amul has also become more aggressive with launch of new variants such as
Mozzarella cheese (used in Pizza), cheese powder, etc,
The entry of new players and increased marketing activity is expected to expand the
market. All the major players are expanding their capacities.
Milk powder:
Milk powder is mainly of 2 types
29
• Whole milk powder
• Skimmed milk powder
Whole milk powder contains fat, as distinguished from skimmed milk powder,
which is produced by removing fat from milk solids. Skimmed milk powder is preferred
by diet conscious consumers. Dairy whiteners contain more fat than skimmed milk
powder but less compared to whole milk powder. Dairy whiteners are popular milk
substitute for making tea coffee etc. The penetration of these products in milk abundant
regions is driven by convenience and non perishable nature (longer shelf life) of the
product.
Dairy sector of advanced nations export milk products with a subsidy of $1000
per tonne with a level of subsidy more than 60% of the price of milk powder produced
in India, this has led to large scale imports of milk powder both in whole and skimmed
form. To protect the domestic sector from these subsidized imports the central
government has recently increased the basic import duty on all imports of milk powder
more than 10000MT the basic customs duty has been left unchanged at 15%.
In 2009-2010 India is estimated to have imported about 18,000 tonnes of milk
powder against a total estimated production of 2.40 Lakh MTs. In 2010-11 India is
expected to export 10000 MT of skimmed milk powder due to rise in international
prices to $2300 per MT from last year's levels of $1400per Mt. These expectations are
based on the strong demand from Russia, East Asia and Latin America, and also on
tightening of supply in EU, which accounts for 75% of the annual global skimmed milk
powder exports.
Major players:
Milk powder / Dairy Whiteners: major skimmed milk brands are sagar
(GCMMF) and Nandini (Karnataka Milk Federation), Amul Full Cream milk powder is
a whole milk powder brand.Leading brands in the dairy whitener segment are Nestele's
Everyday, GCMMF's Amulya, Dalmia industry's Sapan, Kwality Dairy India's
KreamKountry, Wockhardt's Farm Fresh and Britannia's Milkman Dairy Whitener.
30
Condensed Milk:
The condensed milk market has grown from 9000 MT in 2008 to 11000 MT in
2009. Condensed milk is a popular ingredient used in home - made sweets and cakes.
Nestle s Milkmaid is the leading brand with more than 55% market share. The only
other competitor is GCMMF's Amul.
Value addition in milk powder - infant foods:
Nestle is the market leader in the segment. This is a category where brand
loyalties are very strong as mothers want the best for their babies Heinz is the only
other significant competitor to Nestle in this segment. Nestles Cerelac and Nestum
together have around 80% market shares and Heinz's Farex has close to 18% share.
Wockhardt is a relatively new entrant with its First Food Brand. Lockhart also proposes
to launch a new baby food Esau containing mooing (mooing is one of the easily
digestible pulses) The Esau brand will directly compete with Nestles Nostrum (made
from rice). In infant formula also Nestlé’s Lactose formula and Lactose standard
formula are the leading brands with around 75% market share.
REGULATORY FRAME WORK:
The dairy industry was de - licensed in 1991 with a view to encourage private
investment and flow of capital and new technology in the segment. Although de-
licensing attracted a large number of players, concerns on issues like excess capacity,
sale of contaminated / substandard quality of milk etc induced the government to
promulgate the MMPO (Milk and Milk Products Order) in 1992. Milk and Milk
Products Order (MMPO) regulates milk and milk products in the country. The order
requires no permission for units handling less than 10,000 liters of liquid milk per day
or manufacturing milk products containing between 500 to 3,750 tones of milk solids
per year. Plants producing over 75,000 liters of milk per day or more than 3,750 tones
per year of milk solids have to be registered with the Central Government. The stringent
regulations, government controls and licensing requirements for new capacities have
31
restricted large Indian and MNC players from making significant investments in this
product category.
Most of the private sector players have restricted large Indian and MNC Players
from making significant investments in this product category. Most of the private sector
players have restricted themselves to manufacture of value added milk products like
baby food, dairy whiteners, condensed milk etc.
All the milk products except malted foods are covered in the category of
industries for which foreign equity participation up to 51% is automatically allowed. Ice
cream, which was earlier reserved for manufacturing in the small - scale sector, has now
been de - reserved. As such, no license is required for setting up of large - scale
production facilities for manufacture of ice cream. Subsequent to de - canalization,
exports of some milk based products are freely allowed provided these units comply
with the compulsory inspection requirements of concerned agencies like: National
Dairy Development Board. Export Inspection Council etc, Bureau of Indian standards
has prescribed the necessary standards for almost all milk - based products, which are to
be adhered to by the industry.
Maul’s secret of success:
The system succeeded mainly because it provides an assured market at
remunerative prices for producers' milk besides acting as a channel to market the
production enhancement package. What's more, it does not disturb the agro - system of
the farmers. It also enables the consumer an access to high quality milk and milk
products. Contrary to the traditional system, when the profit of the business was
cornered by the middlemen, the system ensured that the profit goes to the participants
for their socio -economic upliftment and common good.
Looking back on the path traversed by Amul, the following features make it a pattern
and model for emulation elsewhere. Amul has been able to:
Produce an appropriate blend of the policy makers farmers board of management
and the professionals: each group appreciation its roles and limitations.
32
Bring at the command of the rural milk producers the best to the technology and
harness its fruit for betterment.
Provide a support system to the milk producers without disturbing their agro -
economic systems
Plough back the profits, by prudent use of men, material and machines in the rural
sector for the common good and betterment of the member producers and
Even though, growing with time and on scale, it has remained with the smallest
producer members. In that sense, Amul is an example par excellence, of an intervention
for rural change.
The Union looks after policy formulation, processing and marketing of milk,
provision of technical inputs to enhance milk yield of animals, the artificial
insemination service, veterinary care, better feeds and the like - all through the village
societies.
The village society also facilitates the implementation of various production
enhancement and member education programs undertaken by the union. The staff of the
village societies has been trained to undertake the veterinary first - aid and the artificial
insemination activities on their own.
Amul's success: A model for other districts to follow.
Amul's success led to the creation of similar structures of milk producers in other
districts of Gujarat. They drew on Amul's experience in project planning and execution.
Thus the Anand Pattern' was followed not just in Kaira district but in Mehsana,
Sabarkantha, Banaskantha, Baroda and surat districts also.
Even before the Dairy Board of India was born, farmers and their leaders carried out
empirical tests of the hypotheses that explained Amul's success. In these districts, milk
producers and their leaders experienced significatnt commonalities and found easy and
effortless ways to adapt Amul's gameplan to their respective areas.
This led to the Creation of the National Dairy Development Board with the clear
mandate of replicating the Anand pattern' in other parts of the country. Initially the
33
pattern was followed for the dairy sector but at a later stage oilseeds, fruit and
vegetables, salt, and tree sector also benefited from it's success.
GCMMF: An overview
Gujarat Cooperative Milk Marketing Federation (GCMMF) is India's largest
food products marketing organization It is a state level apex body of milk cooperatives
in Gujarat which aims to provide remunerative returns to the farmers and also serve the
interest of consumers by providing quality products which are good value for money.
Members: 12 district cooperative milk producers' union.
No. of Producer Members: 2.12 Mill
No. of Village Societies: 10,411
Total Milk Handling Capacity: 6.1 Million liters per day
Milk Collection (Total 2009-2010): 1.59 billion liters
Milk Collection (Dairy Average 2009-10): 4.47 million liters
Milk Drying Capacity: 450 Metric Tons Per Day
Cattle Feed Manufacturing Capacity: 1450 MTs Per Day
34
Sales Turnover Rs (Million) US $ (million)
2004-05 11140 355
2005-06 13790 400
2006-07 15540 450
2007-2008 18840 455
2008-09 22192 493
2009-10 22185 493
Major dairy products manufacture:
Company Brands Major Products
Nestle India Limited Milkmaid, Cerelac,
Lactogen, Milo,
Everyday
Sweetened condensed milk,
malted foods, milk powder
and Dairy whithner
Milkfood Limited Milkfood Ghee, ice cream, and other
milk products
Smith Kline Beecham
Limited
Horlicks, Maltova,
Viva
Malted Milkfood, ghee, butter,
powdered milk, milk fluid and
other milk based baby foods.
Indodan Industries Limited Indana Condensed milk, skimmed
milk powder, dairy milk
whitener, chilled and
processed milk
Gujarat Co-operative Milk
Marketing Federation
Limited
Amul Butter, cheese and other milk
products
H.J. Heinz Limited Farex, Compan,
Glactose,
Bonniemix,
Vitamilk
Infant Milkfood, Malted
Milkfood
Britannia Milkman Flavored milk, cheese, Milk
Powder, Ghee
Cadbury Bournvita Malted Food
6. FUTURE PROSPECTS:
35
India is the world's highest milk producer and all set to become the world's
largest food factory. In celebration, Indian Dairy sector is now ready to invite NRIs and
Foreign investors to find this country a place for the mammoth investment projects. Be
it investors, researchers, entrepreneurs, or the merely curious - Indian Dairy sector has
something for everyone.
Milk production is relatively efficient way of converting vegetable material into
animal food. Dairy cow's buffalo's goats and sheep can eat fodder and crop by products
which are not eaten by humans. Yet the loss of nutrients energy and equipment required
in milk handling inventory make milk comparatively expensive food. Also if dairying is
to play its part in rural development policies, the price to milk producers has to be
remunerative. In a situation of increased international prices low availabilities of food
aid and foreign exchange constraints, large scale subsidization of milk conception will
be difficult in the majority of developing countries.
Hence in the foreseeable future, in most of developing countries milk and milk
products will not play the same roll in nutrition as in the affluent societies of developed
countries. Effective demand will come mainly from middle and high income consumers
in urban areas.
There are ways to mitigate the effects of unequal distribution of incomes. In
Cuba where the Government attaches high priority to milk in its food and nutrition
policy, all pre - school children receive a daily ration of almost a liter of milk fat the
reduced price. Cheap milk and milk products are made available to certain other
vulnerable groups, by milk products outside the rationing system are sold price which is
well above the cost level. Until recently, most fresh milk in the big cities of China was a
reserved for infants and hospitals, but with the increase in supply, rationing has been
relaxed.
36
COMPANY PROFILE
We have established a dairy unit named Tirumala Milk products (P) Limited,
at Kadivedu Village, Chillakur Mandal, Nellore District, Andhra Pradesh and
commissioner for commercial production for marketing during September 1999 to handle
2,25,000 liters of milk per day. The plant is located on Calcutta-Chennai National High
way, 9kms from Gudur town towards Chennai, in an are of 13.00 acres.
1. Inception
2. Vision
3. Mission
4. Policies
INCEPTION:
The unit is registered under S.S.I. The milk is bulk is being purchased from other
dairies processed, homogenized, packed and marketed mainly in Chennai, Bangalore and
Mysore cites. The milk is being also sold in Guduru, Tirupathi and Nellore towns basing
on consumers’ demand. By marketing the milk in various towns, assured market. Out let
is provided to large number of village milk producers for their surplus are applied before
machinery is installed in the dairy. Strict quality standards are applied before marketing
the milk for which well equipped laboratory is established. In order to deliver quality
milk to the consumers insulted trucks are used to transport milk from the dairy to various
destinations.
VISION:
Tirumala Milk Products (P) Limited is a dream come true to the dynamic young
entrepreneurs who have jointly efforted to convert their skills, knowledge and experience
in the field of processing and producing milk and milk products.
Realizing the Milk Product Potentialities of the inversion track of the Government
of Andhra Pradesh and Government of India, with self managed financial resources and
established the Tirumala Dairy in the year 1995 at Narasaraopet, Guntur District and
erected new plant at Kadivedu in the year 1999. Today, the dairy has posd to equate
major dairies int eh southern region which has not only captured the market but also has
mode “Thirumala” an accepted Brand and preference of the consumers.
37
MISSION:
Tirumala Milk Product (P) Limited is a dream come true to the dynamic young
entrepreneurs who have jointly efforted to convert their skills, knowledge and experience
in the field of processing and producing milk products.
POLICIES:
Realizing the milk product potentialities of the inversion track of the Government of
Andhra Pradesh and Government of India, with self managed financial resources and
established the Tirumala Dairy in the year 1995, at Narasaraopet District, Guntur and
erected new plant at Kadivedu in the year 1999. Today, the dairy has posed to equate
major dairies in the southern region which has not only captured the market but also has
mode “TIRUMALA” an accepted Brand and preference of the consumers.
II. HISTORY AND MILE STONES OF COMPANY:
Tirumala Milk Product (P) Ltd., Handles 6.5 Lakhs litres of milk per day in all
their pacing stations and main dairy plant. TMPPL having good infrastructure and well
equipped with all latest machinery to process 6.5 lakhs liter of milk per day, which is the
highest in the state of Andhra Pradesh has developed in a decade.
TABLE2.7
TMPPL HANDLES MILK IN THE FOLLOWING LOCATIONS
S.No Packing Locations Handling capacity per
day
1 Gudur (Main plant) 4.0 lakhs litre
2 Vellala Cheruvu 1.0 lakhs litre
3 Bhimadolu 1.0 lakhs litre
4 Palamaner 1.5 lakhs litre
PROCUREMENT OF MILK:-
TMPPL established 32 chilling centers in Andhra Pradesh and 11 chilling centers
in Tamilnadu and one in Karnataka procure both buffalo milk. Good quality milk is being
procured and chilled with in short time at chilling centers, to retain freshness of milk.
38
The strength of the TMPPL is to procure 6.0 lakh liters of milk directly from
agents / farmers, by having fully equipped machinery and professionally trained staff.
TMPPL have full control on its systems. So that pure quality of milk products can be
supplied to customers.
Butter: Is made from pure cow & buffalo’s fat under hygienically processed through
continues butter making machine with a capacity.
Ghee: Is made from pure cow & buffalos butter under supervision 30 years’ granulation,
color and aroma of ghee with a capacity of 8 tones per day. Ghee is packed in a wide
range of 7ml to 15 kgs.
Milk powder: Is made from fresh cow & buffalo milk, plant is capable of marketing all
type of milk powders with a capacity of 15 tones per day.
By – products: Like Sterilized Flavored Milk, Lassi, Khava, Milk cake, Mysore Pak,
Panner.
SEVEN PRINCIPLES OF THE ORGANISATION
1. Contribution to society:
We will conduct our selves at all times in accordance with the basic management
objective, faithfully fulfilling our responding as Industrialists to the communities in
which we operate.
2. Fairness and Honesty:
We will be fair and honest in all our business dealings and personal conduct. No
matter now talented and knowledgeable we may be, without personal integrity, we can
neither earn the respect of others nor enhance our own self respect.
3. Co-operation and Team Spirit:
We will pool our abilities to accomplish our shared goals. No matter how talented
we are as individuals, without co-operation and team spirit we will be a company in name
only.
4. Untiring Effort for Improvement:
39
We will strive constantly to improve our ability to contribute to society through
our business activites. Only through this untiring effort can we fulfill our basic
management objectives and help to realize lasting peace and prosperity.
5. Courtesy and Humility:
We will always be cordial and modest, respecting the rights and deeds of others in
order to strengthen healthy social relationships and improve the quality.
6. Adaptability:
We will continually adopt our thinking and behaviour to meet the ever-changing
conditions around us, taking care to act in harmony with nature to ensure progress and
success in our endeavors.
7. Gratitude:
We will act out of a sense of gratitude for all the benefits we have received,
confident that this attitude will be a source of unbounded joy and utility, enabling us to
overcome any obstacles we encounter.
HIERARCHIAL STRUCTURE OF THE COMPANY
BOARD OF DIRECTORS
GENERAL MANAGER
HUMANRESOURE FINANCE MARKETING PRODUCTION
MANAGER MANAGER MANAGER MANAGER
PROBLEM ACCOUNTS EXECUTIVE WORKES
SLOVE SECTION MANAGE
40
MANUFACTURING PROCESS OF MILK
RECEIVING MILK
(GRADING, SAMPLING, WEIGHING, TESTING)
PREHEATING (350-400 C)
FILTRATION/CLARIFICATION
COOLING AND STRONG (50 C OR BELOW)
STANDARDIZATION
PASTEURIZATION (63 C/30 MTS (OR) C/15 Sec)
HOMOGENIZATION (2500 PSI)
PRODUCTION PROCESS:
Pasteurization:
The term pasteurization, applied to market milk today, refers to the process of
heating every practical of milk to at least 630 C or 1450 F for 30 minutes .After
pasteurization, the milk is immediately cooled to 50 C(41 F) or below .
As it is difficult to exercise strict supervision over milk supplies, it becomes necessary
to pasteurize milk so as to make it safe for human consumption. Milk is pasteurized to
render it safe for human consumption by destruction of sent percent pathogenic
microorganisms and to improve the keeping quality of milk by destruction of almost all-
spoiling organisms.
41
Standardization:
Standardization of milk refers to adjustment of the fat and /or solids not fat
percentage of milk to desired value so as to conform to the legal or other requirements.
Milk is standardized by the addition of milk or cream with a higher or lower fat
percentage than of milk to be standardized. Sometimes the additions of skimmed milk
will do. Downward standardization for fat is practiced is many countries. The surplus is
transformed into butter or ghee.
The prevention of Food Adulteration Act defines standardized milk as cow
and buffalo milk in which the milk fat content is adjusted to 4.5% or more with the SNF.
Atleast 8.5% high milk fat content may be adjusted downward by removing milk or fat or
by adding skimmed and/or reconstituted milk. In the case of low milk fat content, fat may
need to be added to assure the legal minimum.
Standardized milk may be marketed as such or used for making certain products.
Standardization ensures milk of practically uniform and constant composition and
nutritive value to the consumer. The surplus fat can be converted into butter and ghee.
Consequently; milk can be supplied at low cost. Standardized milk is easier and digests.
RECOMBINATION:
This refers to the product obtained when butter, oils, skimmed milk powder, and
water are combined in the correct preposition to yield fluid milk. The Prevention of Food
Adulteration Act Rules 1976 defines recombined product as the milk product resulting
from the combining of milk fat and milk solids not fat in one or more of the various forms
with or without water.
Under the prevention of Food Adulteration Act Rules 1976, recombined milk
throughout the century should contain a minimum of 30% fat and 8.5% solids not fat. The
Food and Agriculture Organization of the United Nations extensively produced
recombined milk under the operation flood scheme in Mumbai, Kolkata, Delhi, and
Chennai during 1970-74, from butter oil and skimmed milk powder donated under the
World Food Program Project.
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The technique of recombination involves dispersion of milk powder in water at
about 45 C, addition of milk fat to make a mixture, filtration and clarification of the
mixture, followed by homogenization and pasteurization at 75 C for 15 Seconds.
The physical, chemical, and functional properties of raw material and used in
such preparation determine the flavor, acceptability, and shelf life of the recombined
product. The use of low-heat, on-fat milk powder with quick wetting ability, increased
solubility, and improved dispensability results into acceptable milk. The introduction of
butter oil without appropriate technology of it`s has caused problem in acceptance of
recombined milk.
Toning:
Toned milk refers to milk obtained on addition of water and skimmed milk
powder to while milk .Under the Prevention of Food Adulteration Rules 1976, toned milk
should contain a minimum of 3% fat 8.5% solids not fat throughout the country.
Toned milk is also called single toned milk and is prepared by toning milk with
fresh separated milk reconstituted from spray-dried skimmed milk powder.
Sometimes, milk is double-toned in order to provide cheap milk (with fat content
only 1.5%) to weaker sections. Toning is a process of reducing fat content i.e. mainly
used for providing cheap milk to the poor.
CONTENTS OF THE PRODUCTON
1. At first milk would be collected from the ruler villages through transportation.
2. In the factory milk cans are weighed in units of liters.
3. After weighing process the milk cans will send for laboratory for testing the factor
percentage.
4. After determination of fat percentage process will take.
5. At first the ilk would be pouted to drum tank and then It will be sent to the chillers for
storage of Milk. This milk will again sent to the heaters for the destroying the bacteria
and again mild would Sent to the chillers for storing. This milk will send to the tankers
for storing long time. These tankers will attach to the pre-pack machine. And the last
stages the milk will be packed through this machine.
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6. Now pure milk will come out.
7. Package will be in three sizes,
Small – 3 Rs
Medium – 7 Rs
Large – 15 Rs
(a) Company C.M.D:
TMPPL has its main dairy plant at kadivedu with handling and local procurement.
TMPPL has well maintained laboratories in all their dairies. Technically qualified staff is
looking after testing of milk and milk products. Quality assurance programmers are
implemented at every stage to ensure quality of milk and products.
(b) Marketing Manager:
Main plant is processing 2.5 lakhs liter of milk per day in automatic sachet filling
machines to supply and distribution of milk to Chennai, Tirupathi, Nellore etc., in
insulated pubs.
(c) Roles:
The main dairy has powder plant of 15 tons capacity per day. The plant has been
designed to product 15000 kgs of milk power on a 20hours/ day. Evaporation is done in
multiple effect falling film evaporators and powder is manufactured with high pressure
nozzles pray dryer. The water evaporation capacity of the evaporator is 9400kg/hr and
spray dryer is designed to 753 kg/hr. Fluid dbe dryer is also provided.
III. FUNCTIONAL ACTIVITIES:
Marketing:
TMPPL is having good marketing of milk and milk products, arketing offices at
Chennai, Bangalore & Hyderabad is having good distribution system. All the marketing
Executives are professionally trained and having good skills and experience in marketing
products. To maintain cold chain there are about 35 insulated puff vehicles to trans port
milk to various towns. There is tremendous in crease in sales of milk card milk products
due to best quality, there are about 3000 out tets in AP, Tamilanadu and Karanataka. The
dairy is catering need of 10 lakh customers daily in southern region.
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FINANCE AND ACCOUNTS SECTION:
This section functions under the control of manager (Finance and accounts).The
Finance and accounts section maintains all financial administrative and production
accounts of the union. it is also said that “money makes man lives” and “money is what
money does.
Finance of the Section:
The main function of accounts and finance section is the maintenance of books of
accounts. Preparation of financial accounts , Financial statement, Preparation of Budget
for future accounting year. Pay roll accounts for casual laborers.
The maintenance of the cash records in connection with banking transaction (co-
operative bank located in the organization itself) is also done in this department. All
matters relating to accounting and financial nature should come through this section.
Accounting year of the company.
April to march is the accounting year of the company.
Auditing:
Auditing is a very important requisite of a company to check the trueness of the
accounts. For this purpose the company has both internal audits the annual audit is under
taken only by auditors. These audits include all milk marketing offices, procurement team
and the whole organization in respect of auditing classification the sale dairy has been in
“c” class for the past three years.
MAINTENANCE OF ACCOUNTS AND BOOK:
1) DAY BOOK:
All cash entries are entered first in day book. This book mainly deals with the
various advance provided to workers and the deduct made.
2) GENERAL LEDGER:
It is a larger where in the day book entries are posted.
The Books maintained in this department are:
1. Cash book.
2. Day book,
3. Sundry debtors book,
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4. Sundry creditors book,
5. Receipt bill book,
6. Bank payments voucher book,
7. Journal voucher book,
8. Bank recogrational statements book,
9. Debit note book,
10. Credit note book,
11. Salary book,
12. Purchase book,
13. Sales book,
14. Causal labour management book,
15. Employees welfare register,
PURCHASE SECTION:
All purchasing transaction on incoming goods transactions are done through this
department. The purchase procedure is initiated by the store keeper on a request can be
communicated orally to the store authority by the plant engineer or by written means (i.e.)
through indent.The type and channel of purchases are decided by the purchasers and the
type of product to be produced will be decided with the help of previous purchases of
item and types of terms of be purchased.
OBJECTIVE OF PURCHASE DEPARTMENT:
To provide uninterrupted blow of material.
To keep inventory investment and lessees at a maximum.
To pay reasonable low price of supply.
To develop satisfaction sources of supply.
To develop good vender relation for security good performance.
PURCHASE SECTION:
Purchase section deals only with spares and consumable items, milk
purchase does not come under the section milk procurement activities are
done by a separate section (i.e.) procurements and input section.
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NATURE OF PURCHASE
Centralized purchase system is follow in this union. There is also a purchases
section for purchasing all the materials required for the organization and the various
authorities and section under it are with marketing officer . Procurement teams and the
village level, primary co-operative societies.
The following materials are purchased by this section for the union
and its departments. Your directors have pleasure is submitting they 10 th
annual report and audited accounts for the financial year 2010-2011.
Financial Results
The Consolidated Financial Results for the year ended 31th March, 2011, are
summarized below (Rs. In lacs)
PARTICULARS 31-03-2011 31.03.2010
CURRENTYEAR PREVIOUSYEAR
1. SALES 37380.24 28527.34
2. PROFIT BEFORE INTEREST 2221.87 1247.78
3. DEPRECIATION 526.75 403.69
4. INTEREST 371.11 235.9900
5. PFROFIT BEFORE TAX 1324.01 608.10
6. CURRENT YEAR TAX 329.87 137.95
7. F B T 6.28 5.48
8. EARLIER YEARS TAX 1.78 10.22
9. PROFIT AFTER TAX 989.98 454.45
10. BROUGHT FORWARD BALANCE 1211.27 756.82
11. BALANCE CARRIED TO BALANCE SHEET 2201.25 1211.27
REVIEW OF OPERATION:
During the year under review the following companies are amalgamated.
1) Tirumala Milk Product Pvt.Ltd. – Amalgamated Company
2) Tirumala Dairy Pvt.Ltd – Amalgamating Company
3) Janaki Rama Dairy Pvt. Ltd – Amalgamating Company
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4) Pragathi Milk Products Pvt.Ltd – Amalgamating Company
5) Bhaktanjaneya Milk Foods Pvt. Ltd - Amalgamating Company
As the share holders are aware of the amalgamation is to carry out the business
more economically and profitably by expanding the activities of the company. The
scheme of amalgamation is approved by the Honorable High Court of A.P as under
Tirumala Dairy Pvt Ltd. For 20 shares 1 share of Tirumala Milk Products (P) Ltd.,The
share application money with amalgamating shall be transferred to amalgamated
company and will treat accordingly.
Review of Financial Statements:
The company has achieved a turnover of Rs.28527 lakhs as against 22202 lakhs for
previous year recording increase of 28.49% over the previous year. And the net profit
margin was increased to 2.13% from 1.40% i.e Rs.608.10 lakhs 311.80 lakhs of previous
year.
Production:
The main plant has capacities with equipment to manufacture milk products like butter,
ghee and milk powder.
HUMAN RESOURCE:
The primary functions of the personnel department are responsible for initiating
evolving general policies procedure with practiced common with the future objectives of
the company. Responsible for leaving uniform service conditions for all employees.
Responsible for recruitment and promotion of officers and respect of posting various
groups users.
PRODUCTION:
TMPPL has its main dairy plant at Kadiveedu with handing capacity of 4.0 lakhs.
Lts. Of milk per day from various chilling centers and local procurement.
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Market Milk: Main plant is processing 2.5 lakhs liter of milk per day in automatic sachet
filling machines to supply and distribution of milk to Chennai, Tirupathi, Nellore etc, and
insulated pubs.
There is continuous growth is sales of milk from 5000 lts to 2,50,000. Its with in a
span of one decade. TMPPL maintaining consistency in quality and its standards
consumers have much confidence.
TMPPL having its own supply chain management, which makes ease in timely
distribution and assured supply, which gains customers satisfaction.
At our palmer unit process and supply of 1.00 lakh liters of milk and 2000 liters of
cured to Bangalore city.
At our Vellachervu & Bhimadolu packing stations processing and packing 2.00 lakhs
liters of milk to Hyderabad, Warangal, Vijayawada, Eluru, Guntur and Rajahmundry.
IV. Research & Development:
Quality Assurance:
TMPPL has well maintained laboratories in all their dairies. Technically qualified
staff are looking after of milk and products. Quality assurance programmes are
implemented at every stage to ensure quality of milk and milk products.
This dairy is am ISO 9001:2000 and an ISO 22000:2005 certified company. The dairy
is following quality management system and food safety standards.
TMPPL is having ISI License and Agmark License and all other statutory standards as
per requirements.
There is continuous growth in procurement and sales the capacities of the plant are
also increased to handle the milk to manufacture milk products.
To meet the demand in market there is also plant to introduce products like cup curd,
lussey in retail markets.
From time to time consumer are identified and producing the new products to satisfy
the customer, continual surveys are conducted to get feedback information for analysis.
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V. RATIONALITY OF TAB THE TOPIC SELECTED IN THE COMPANY:
“Capital budgeting” decisions are paramount importance in financial decision
making. In the first place, such decisions affect the profitability of a firm. They also have
a bearing on the competitive position of they enterprise mainly because of the fact that
they relate of fixed assets. The fixed assets represent in a services. The true earning assets
of the firm. They enable the firm the generate finished goods that can ultimately be sold
from profit. The rather they precede a buffer that allows the if firms to make sales and set
end. True current assets are important the operating. That with out fixed assets to generate
finished products that can be converted into current assets it firm involve a relatively
small amount of funds therefore, such capital investment decision may results in a major
depurative from what the company has been depurative from what the company has been
doing in the past capital budget decision determine the future dusty of it company.
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The study in “A STUDY ON CAPITAL BUDGETING IN TIRUMALA MILK
PRODUCT PVT LTD” can to know that they are two side of the project that the
investment side. The separation principle says that the cash flows associated with these
sides should be separate while extricating the cash inflowing an investment side do not
consider it formal charge like interest or dividend and fixed long term assets by the
company. It is suggested to hold the company in the same level. It also reveals that cases
blows having ups and downs due to expansions of assets simultaneously depreciation.
CAPITALBUDGETING
The field of capital budgeting is both comprehensive and challenging. It is clearly
plays a vital role in assigning most business firms to achieve there various goals (e.g.,
profitability, growth, stability, risk reduction, social goals, etc) it has been closely allied
to the economic problem. This is rather broadly defined as the allocation of scarcer
resources among competing alternatives.
Capital budgeting may be defined as the planning, evaluation and selection of
capital expenditure proposal as distinguished from operating year, capital expenditures
represent outlay whose principal benefits will be recognized over longer period of time.
Decision relating to capital expenditures as opposed to those for operating
expenditures, are generally irreversible and they require careful selection techniques and
procedures. Capital budgeting is commonly referred to as fixed asset management, when
integrated with the financial manager’s goal of attending proper combination of assets
( i.e., optimal asset mix), fixed asset assume a great deal of significance. Fixed assets are
also frequently termed as the ‘earning asset’ of the firm since they usually generate large
returns. Since assets are the sources of revenue generation for the firm and fixed asset its
principal sources, it appears logical that future sales growth is heavily correlated with the
expansion of capital expenditures.
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DEFINITION:
Capital budgeting is defined as “the firm decision to invest its current funds most
effectively in long term activities in anticipation of an expected flow of future benefit
over a serious of year.
Capital budgeting includes are those expenditure which are expected to produce
benefits to the firm over more than one year, and encompasses both tangible and
intangible assets. Many companies follow the traditional benefits occurring only the
expenditure on tangible fixed assets.
“Capital budgeting involves the process of planning expenditure whose returns are
expected to extend beyond one year”.
-Weston & Brigham
“Capital budgeting is long term planning for making and financing proposed
capital outlay”.
-Charles T.Horngeren
FEATURES OF CAPITAL BUDGETING DECISION:
Potentially large anticipated benefits.
A relatively high degree of risk.
A relatively long time period between the initial outlay and the anticipated returns.
NATURE OF CAPITAL BUDGETING DECISIONS:
The investment decision of a firm are generally know as the capital budgeting or
capital expenditure decisions. A capital budgeting decision may be defined as the firm’s
decision to invest its current funds most effectively in the long term assets in anticipation
of an expanded flow of benefits over a series of years. The long term assets are those that
affect the firm’s operational beyond the one year period.
Investment decisions generally include expansion, acquisition modernization and
replacement of the long term asset sale of a division or business (divestment) is also an
investment decision. Decision like the change in the method of sales distribution or an
advertisement campaign or a research and developing program have long term
implication for the firm’s expenditures and benefits and therefore they should also be
evaluated as investment decision.
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The argument that capital is a limited resource is true of any form of capital,
whether debt or equity (short-term or long-term, common stock) or retained earnings,
accounts payable or notes payable, and so on. Even the best known firm in an industry or
a community can increase its borrowing up to a certain limit. Once this pint has been
reached, the firm will either be denied more credit or be charged a higher interest rate,
making borrowing a less desirable way to raise capital.
CAPITAL BUDGETING PROCESS:
Capital budgeting is a complex process as it involves decisions relating to the
investment of current funds for the benefits to be achieved in future and the future is
always uncertain. However, the following procedure may be adapted in the process of
capital budgeting. There are five stages in the capital budgeting.
Identification of investment opportunities:
The capital budgeting process begins with the identification of potential
investment opportunities. Typically, the planning body (it may be an individual or
committee organized formally or informally) develops estimates of future sales which
identifying required investment in plant and equipment.
Identification of investment ideas it is helpful to:
Monitor external environment regularly to scout investment opportunities.
Formulate a well defined corporate strategy based on through analysis of strengths,
weaknesses, opportunities and threats.
Share corporate strategy and respective with persons.
Motivate employees to make suggestions.
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Identification of investment opportunities
Assembling of investments
Decision making
Performance review
Implement action
Preparation of capital budgeting
Assembling of investments:
Investment proposal identified by the production department and other department
are usually submitted in a standardized capital investment proposal form. Generally, most
of the proposal, before they reach the capital budgeting committee or viewed from
different angle. It also helps in creating a climate for bringing about co-ordinations of
inter related activities.Investment proposals are usually classified into various categories
for facilitating decision making, budgeting and control.
Replacement investments
Expansion investment
New product investment
Obligatory and welfare investment
Decision making:
A system of rupee gateways usually characterized capital investment decision
making. Under this system executive are vested with the power to pay investment
proposals up to certain limits.
Preparation of capital budgeting:
Projects involving smaller outlays and which can be decided by executives at
lower levels are often covered by a blanket appropriation for expenditures action. Projects
involving larger outlays are included in the capital budget after necessary approvals.
Before under facing such projects an appropriation order is usually required. The purpose
of this check is mainly to ensure that the funds position of the firm satisfactory at the time
of implementation.
Implementation action:
Translating an investment proposal into a concert project is a complex, time consuming
and risk fraught task.
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Adequate formulation of projects:
The major reasons for delay is insinuate formulation of projects but differently, if
necessary home work in terms of preliminary comprehensive and detailed formulation of
the project.
Use of the principal of responsibility accounting:
Assigning specific responsibility to project managers for completing the project
within the defined time frame and cost limits is helpful for expeditious execution and cost
control.
Use of network techniques:
For project planning and control several network techniques like PERT
(Programmed evolution review techniques) and CPM (Critical path method) is available.
Performance review:
Performance review or post completion is a feed back device. It is a means for
comparing actual performance with projected performance. It may be conducted, most
appropriately. When the operation of the project have been stabilized. It is useful in
several ways
* It throws light on how realistic were the assumption underlying the project.
* It provided a documented log of experience that is highly valuable for decisional
making.
Components of capital budgeting:
Initial investment outlay:
It includes the cash required to acquire the new equipment or build the new plant
less any net cash proceeds from the disposal of the replaced equipment. The initial outlay
also includes any additional working capital related to the new equipment. Only changes
that occur at the beginning of the project are included as part of the initial investment
outlay. Any additional working capital needed or no longer needed in a future period is
accounted for as a cash outflow or cash inflow during the period.
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Net cash benefits or savings from the operations:
This component is calculated as under:
(The incremental change in operating revenues minus the incremental change in
the operating cost=incremental net revenue) minus (taxes) plus or minus (Changes in the
working capital and other adjustments).
Terminal cash flow:
It includes the net cash generated from the sale of the assets, tax effects from the
termination of the asset and the release of networking capital.
The net present value techniques:
Although there are several methods used in capital budgeting, the net present
value technique is more commonly used. Under this method a project with a positive
NPV implies that it is worth investing in.
Basic steps of capital budgeting:
1. Estimate the cash flows.
2. Assess the risk ness of the cash flows.
3. Determine the appropriate discount rate.
4. Find the PV of the expected cash flows.
5. Accept the project if PV of inflows> costs. IRR> Hurdle Rate and/or payback<policy.
Faced with limited sources of capital, management should carefully decide whether a
particular project is economically acceptable. In the case of more than one project,
management must identify the projects that will contribute most to profits and,
consequently, to the value (or worth) of the firm. This, in essence, is the basis of capital
budgeting.
Investment decisions- capital budgeting
Capital budgeting is vital in marketing decisions. Decisions on investment, which
take time to measure, have to be based on the returns which that investment will make.
Unless the project is for social reasons only, if the investment is unprofitable in the long
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run, it is unwise to invest in it now. Often, it would be good to know the present value of
the future investment is, or how long it will take to mature (give returns). It could be
much more profitable putting the planned investment money in the bank and earning
interest, or investing in an alternative project.
Typical investment decisions include the decision to build another grain silo,
cotton gin or cold store or invest in a new distribution depot. At a lower level, marketers
may wish to evaluate whether to spend more on advertising or increasing the sales force,
although it is difficult to measure the sales to advertising ratio.
Chapter objective:
This chapter is intended to provide:
An understanding of the importance of capital budgeting in marketing decision
making.
An explanation of the different types of investment project.
An introduction to the economic evaluation of investment proposals.
The importance of the concept and calculation of net present value and internal rate of
return in decision making.
The advantages and disadvantages of the payback method as a technique for initial
screening of two or more competing project.
Capital budgeting versus current expenditures:
A capital investment project can be distinguished from current expenditures by two
features:
a) Such projects are relatively large.
b) A significant period of time (more than one year) elapses between the investment
outlay and the receipt of the benefits.
As a result, most medium sized and large organizations have developed special
procedures and methods for dealing with these decisions. A systematic approach to
capital budgeting implies:
a) The formulation of long term goals.
b) The creative search for and identification of new investment opportunities.
c) Classification of projects and recognition of economically and/or statistically
dependent proposals.
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d) The estimation and forecasting of current and future cash flows.
e) A suitable administrative framework capable of transferring the required information
to the decision level.
f) The controlling of expenditures and careful monitoring of crucial aspects of project
execution.
g) A set of decision rules which can differentiate acceptable from unacceptable
alternatives is required.
The last point (g) is crucial and this is the subject of later sections of the chapter.
The classification of investment projects:
a) By project size:
Small projects may be approved by departmental managers. More careful analysis and
board of directors approval is needed for large projects of say, half a million dollars or
more.
b) By type of benefit to the firm:
An increase in cash flow.
A decrease in risk
An indirect benefit (showers for workers, etc).
c) By degree of dependence:
Mutually exclusive projects (can execute project A or B, but not both)
Complementary projects: taking project A increases the cash flow of project B
Substitute projects: taking project A decreases the cash flow of project B
d) By degree of statistical dependence:
Positive dependence
Negative dependence
Statistical dependence
e) By type of cash flow:
Conventional cash flow: Only one change in the cash flow sign.
e.g. -/++++ or +/----, etc
Non- Conventional cash flow: More than one change in the cash flow sign.
e.g. +/-/+++ or -/+/-/++++, etc
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The economic evaluation of investment proposals:
The analysis stipulates a decision rule for:
I) Accepting or
II) Rejecting
Investment projects:
The time value of money:
Recall that the interaction of lenders with borrowers sets an equilibrium rate of
interest. Borrowing is only worthwhile if the return on the loan exceeds the cost of the
borrowed funds. Lending is only worthwhile if the return is at least equal to that which
can be obtained from alternative opportunities in the same risk class.
The interest rate received by the lender is made up of:
I) The time value of money: The receipt of money is preferred sooner rather than later.
Money can be used to earn more money. The earlier the money is received, the greater the
potential for increasing wealth. Thus, to forego the use of money, you must get some
compensation.
II) The risk of the capital sum not being repaid: This uncertainty requires a premium as a
hedge against the risk; hence the return must be commensurate with the risk being
undertaken.
III) Inflation: Money may lose its purchasing power over time. The lender must be
compensated for the declining spending/purchasing power of money. If the lender
receives no compensation, he/she will be worse off when the loan is repaid than at the
time of lending the money.
Future values/compound interest:
Future value (FV) is the value in dollars at some point in the future of one or more
investments.
The general formula for computing future value is as follows:
FVn = V0 (1+r)n Where,
V0 is the initial sum invested, r is the interest rate, n is the number of periods for which
the investment is to receive interest.
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Thus we can compute the future value of what V0 will accumulate to in n years when it is
compounded annually at the same rate of r by using the above formula.
We can derive the present value (PV) by using the formula:
FVn = V0 (1+r)n By denoting Vo by PV we obtain:
FVn = PV (1+r)n
Rationale for the formula:
As you will see from the following exercise, given the alternative of earning 10%
on his money, an individual (or firm) should never offer (invest) more than $10.00 to
obtain $11.00 with certainty at the end of the year.
Net Present Value (NPV):
The NPV method is used for evaluating the desirability of investments or projects.
Where
Ct = the net cash receipt at the end of year t
I0 = the initial investment outlay
r = the discount rate/the required minimum rate of return on investment
n = the project/investment’s duration in year
Decision rule:
If NPV is positive(+): accept the project
If NPV is negative(-): reject the project
d) Perpetuities:
Perpetuities in an annuity with an infinite life. It is an equal sum of money to be
paid in each period forever.
e) The internal rate of return(IRR):
Refer students to the tables in any recognized published source.
(1) The IRR is the discount rate at which the NPV for a project equals zero. This means
that the present value of the cash inflows for the project would equal the present value
of its outflows.
(2) The IRR is the break even discount rate.
(3) The IRR is found by trail and error
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Net Present Value vs. Internal Rate of Return:
Independent vs dependent projects
NPV and IRR methods are closely related because:
I. Both are time-adjustment measures of profitability.
II. Their mathematical formulas are almost identical.
So, which leads to an optimal decision: IRR or NPV?
a) NPV vs IRR: Independent projects:
Independent project: Selecting one project does not preclude the choosing of the other.
With conventional cash flows (-|+|+) no conflict in decision arises; in this case
both NPV and IRR lead to the same accept/reject decisions.
NPV vs IRR independent projects
If cash flows are discounted at k1, NPV is positive and IRR> k1: accept project
If cash flows are discounted at k2, NPV is negative and IRR< k1: reject project
Mathematical proof: for a project to be acceptable, the NPV must be positive,
i.e.,where R is the IRR
Since the numerators Ct are identical and positive in both instances:
Implicitly/intuitively R must be greater than k (R>k).
If NPV=0 then R=K: the company is indifferent to such a project.
Hence, IRR and NPV lead to the same decision in this case.
b) NPV vs IRR: Dependent projects:
NPV clashes with IRR where mutually exclusive projects exist.
Up to a discount rate of k0: project B is superior to project A, therefore project B is
referred to project B.
Beyond the point k0: project A is superior to project B, there project is preferred to
project B.
The two methods do not rank the projects the same.
Differences in the scale of investment
NPV and IRR may give conflicting decisions where projects differ in their scale of
investment.
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The payback period (PBP):
The CIMA defines payback as ‘the time it takes the cash inflows from a capital
investment project to equal the cash outflows, usually expressed in years’. When deciding
between two or more competing projects, the usual decision is to accept the one with the
shortest payback.
Payback is often used as a “first screening method”. By this, we mean that when a
capital investment project is being considered, the first question to ask is: ‘How long will
it take to payback its cost?’ The company might have a target payback, and so it would
reject a capital project unless its payback period was less than a certain number of years.
Advantages of payback method:
Payback can be important: long payback means capital tied up and high
investment risk. The method also has the advantage that it involves a quick, simple
calculation and an easily understood concept.
The accounting rate of return- (ARR):
The ARR method (also called the return on capital employed (ROCE) or the return
on investment (ROI) method) of appraising a capital project is to estimate the accounting
rate of return that the project should yield. If it exceeds a target rate of return, the project
will be undertaken.
The payback and ARR methods in practice:
Despite the limitations of the payback method, it is the method most widely used
in practice. There are a number of reasons for this:
It is particularly useful approach for ranking projects where a firm faces liquidity
constraints and requires fast repayment of investments.
It is appropriate in situations where risky investments are made in uncertain markets
that are subject to fast design and product changes or where future cash flows are
particularly difficult to predict.
The method is often used in conjunction with NPV or IRR methods and act as a first
screening device to identify projects which are worthy of further investigation.
It is easily understood by levels of management.
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It provides an important summary method: how quickly will the initial investment be
recouped?
TYPES OF CAPITAL BUDGETING DECISIONS:
Capital budgeting decisions are of paramount importance in financial decision
making. In first place they affect the profitability of the firm. They also have a bearing on
the competitive position of the firm because they relate to fixed assets. The fixed assets
are true goods than can ultimately be sold for profit. Generally the capital budgeting of
investment decision includes addition, deposition, modification and replacement of fixed
assets
Expansion:
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EXPANSION
DIVERSIFICATION
REPLACEMENT
RESEARCH AND DEVELOPMENT
MISCELLANEOUSPROPOSAL
Types of capital budgeting decisions
The company may have to expand its production capacities on accounts of high
demand for its products or inadequate production capacity. This will need additional
capital equipment.
Diversification:
A company may intend to reduce it risk by operating in several activities. In such a
case capital investment may become necessary for purchases of new machinery and
facilities to handle the new product.
Replacement:
`The replacement of fixed assets in place of existing assets, either being worn out
or become out dated on account of new technology.
Research and Development:
Large sums of money may have to be spent for research and development, in case
those industries where technology is rapidly changing. In such cases large sums of money
are needed for research and development activities. So these are also included in the
proposal so Capital Budgeting.
Miscellaneous Proposals:
A company may have to invest money in projects, which do not directly helping
achieving profit-oriented goals. For example, installation of pollution control equipment
may be necessary on account of legal requirements. Therefore, funds are required for
such proposal also.
TECHNIQUES OF CAPITAL BUDGETING DECISIONS:
There are many methods of evaluating profitability of capital investment
proposals. The various commonly used methods are as follows.
Traditional methods or non-discounted Techniques:
1. Payback Period Method or Pay out or Pay off Method.
2. Improvement of traditional Approach to Pay Back Period Method.
3. Rate of Return Method or Accounting Method.
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Time-adjusted method or discounted Techniques:
4. Net present Value Method.
5. Internal Rate of Return Method.
6. Profitability index Method.
TYPES OF CAPITAL BUDGETING DECISIONS:
Capital budgeting decisions are of paramount importance in financial decision
making. In first place they affect the profitability of the firm. They also have a bearing on
the competitive position of the firm because they relate to fixed assets. The fixed assets
are true goods than can ultimately be sold for profit. Generally the capital budgeting of
investment decision includes addition, deposition, modification and replacement of fixed
assets.
Types of Capital Budgeting Decisions:
Cost reduction program
Undertaking an advertising campaign
Replacement of assets
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Capital Budgeting Techniques
Non- DCF criteria
DCF criteria
Pay Back Period(PBP)
Accounting Rate of Return(ARR)
Net Present value(NPV)
Internal Rate of return(IRR)
Profitability Index(PI)
Obtaining new facilities or expanding existing ones
Merger analysis
Refinancing an outstanding debt issue
New and existing product evaluation
No profit investments(e.g., health and safety)
IMPORTANCE OF CAPITAL BUDGETING:
Capital budgeting decisions are among the most crucial and critical decisions and
they have significant impact on the future profitability of the firm. A special care should
taken while making capital decisions, because it influences all the branches of a company
such as production, marketing, personnel, etc. the other reasons for keeping more
attention on capital budgeting decisions include the following:
Long term implications:
Investment of large funds:
Irreversible decisions:
Most difficult to make:
Rising of fund
PAY BACK PERIOD (PBP) :- (Rs in lakhs_)
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The pay back period (PB) is one of the most popular and widely recognized
traditional methods of evaluating investment proposals. Pay back is the number of years
required to recover the original cash outlay invested in a project.
If the project generates constant annual cash inflows, the pay back period can be
computed by dividing cash outlay by the annual cash in flow.
Pay Back Period = Initial Investment
Annual Cash Inflow
C0 : Initial Investment
C : Annual Cash in flow
In case of unequal cash inflows, the pay back period can be found out by adding up the
cash inflows until the total is equal to the initial cash outlay.
PAY BACK PERIOD
YEAR INCOME
(PAT) (RS
LAKHS )
DEPRECIATION
(RS LAKHS )
CASH IN
FLOW (RS
LAKHS )
CUMULATIVE CASH
IN FLOWS (RS LAKHS)
1 12573363.72 16089603.00 28662966.72 28662966.72
2 12573363.72 19701376.88 32274740.60 60937707.32
3 22733566.67 39089995.71 61823562.38 122761269.70
4 47015367.90 40369063.00 87384430.90 210145700.60
5 98786932.00 52675282.00 151462214.00 361607914.60
Initial outlay = 254955806.95 (lakhs)
Payback period = 4 + 254955806.95-210145700.60
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151462214.00
44810106.35
= 4 + 44810106.35
151462214.00
= 4 + 0.296
= 4.3years
Criteria for evaluation:
The pay back period computed for a project is less than the pay back period set
by management of the company, it would be accepted. A project actual pay back period
is more than the determined period by the management, it will be rejected.
Decision:
The standard payback period is set by TIRUMALA MILK PRODUCTS
PRIVATE LTD for considering the expansion project is six years, where as actual
payback period is 4.3years. Hence we accept the Project.
AVERAGE RATE OF RETURN (ARR) (OR)ACCOUNTING RATE OF
RETURN (ARR): as in lakhs
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The accounting rate of return (ARR) also known as the return on investment (ROI)
uses accounting information, as revealed by financial statements, to measure the
profitability of an investment. The Accounting rate of return is the ratio of the average
after fax profit divided by the average investment. The average investment would be
equal to half of the original
ACCOUNTING RATE OF RETURN
YEAR EBT TAXATION CASHINFLOWS
1 12512573363.72 4266274,00 8307089.72
2 12512573363.72 4341000.00 8232363.72
3 22722733566.67 8446490.00 14287076.67
4 47047015367.90 13794988.00 33220379.90
5 98798786932.00 32986706.00 65800226.00
Average profit = 129847136.01 = 25969427.20
5
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Average investment = 254955806.95 = 127477903.48
2
= 25969427.20 X 100
12747790.48
= 0.10 x 100
= 10.00
Criteria for evaluation:
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According to this method ARR is lower than minimum rate of return set by the
management are accepted. The project is having dissatisfactory ARR so the
management has to reject the project.
Decision:
The standard Average Rate of Return set by TIRUMALA MILK PRODUCTS
PRIVATE LTD management is 21%. The actual ARR is 20.00% is lower than the
standard ARR set by the management; hence we reject the project because the rate of
return of the project is lower than the standard.
Net Present Value: - Rs in lakhs
The NPV present value (NPV) method is the classic economic method of
evaluating the investment proposals. If is a DCF technique that explicitly recogniges the
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PBP>SPBP-Rejected
PBP<SPBP-Accepted
PBP - Indifferent
time value at different time periods differ in value and are comparable only when their
equipment present values- are found out.
N P V = C1 + C2 + C3 + ……………..+ C - C0
(1+k) (1+k)2 (1+k)3 (1+k)n
( O r )
n Ci
N P V = - C0
i = 0 (1+k) i
Where
N P V = Net present value
Cfi = Cash flows occurring at time
k = The discount rate
n = life of the project in years
C0 = Cash out lay
NET PRESENT VALUE
YEAR EAT DEP CASH
INFLOWS
DCF
(12%)
PRESENT
VALUE
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1 12573363.72 16089603.0
0
28662966.72 0.893 25596029.28
2 12573363.72 19701376.8
8
32274740.60 0.797 25722968.26
3 22733566.67 39089995.7
1
61823562.38 0.712 44018376.41
4 47015367.90 40369036.0
0
87384430.90 0.636 55576498.05
5 98786932.00 52675282.0
0
151462214.00 0.567 85879075.34
NPV = 236792947.34 - 254955806 95
= - 18162859.61
Criteria for evaluation:
In case of calculated NPV is positive or zero, the project should be accepted. If
the calculated NPV is negative, the project is rejected.
Decision:
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The Net Present Value of TIRUMALA MILK PROUDCTS PRIVATE LTD is
negative.
INTERNAL RATE OF RETURN: Rs in lakhs
The internal rate of return (IRR) method is another discounted cash flow technique
which takes account of the magnitude and thing of cash flows, other terms used to
describe the IRR method are yield on an investment, marginal efficiency of capital, rate
of return over cost, time- adjusted rate of internal return and soon.
i=0 C i SV+WC
IRR = (1+k) i (1+k) n
n
Where
Cfi = Cash flows occurring at different point of time
k = The discount rate
n = life of the project in years
C0 = Cash out lay
SV & WC = Salvage value and Working Capital at the end of the n years.
(or)
I R R = L A + ( H - L )
( A - B )
Where
L : Lower discount rate at which NPV is positive
H : Higher discount rate at which NPV is negative
A : NPV at lower discount rate, L
B : NPV at higher discount rate,
INTERNAL RATE OF RETURN
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YEAR EAT DEP CASH
IN FLOWS
DCF
(12%)
PRESENT
VALUE
1 12573363.72 16089603:00 28662966.72 0.893 25596029.28
2 12573363.72 19701376.88 32274740.60 0.797 25722968.26
322733566.67 39089995.71 61823562 38 0.712 44018376.41
4 47015367.90 40369036.00 87384430.90 0.636 55576498.05
5 98786932.00 52675282.00 151462214.0 0.567 85879075.34
IRR = 12 + 236792947.34-254955806.95 x (12-14)
236792947.34-222028074.10
= 12 + -18162859.61 x - 2
14764873.24
= 12 + (-1.23 x -2)
= 12 + 2.46
= 14.46
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Criteria for evaluation:
In this method the project is accepted when IRR is higher than its cost of capital or
cut out rate. If the project is not accepted when the IRR is less than cost of capital.
Decision:
The project is accepted because of the calculation IRR is higher than its cost of
capital. The cost of capital fixed by management is 10%; the actual is more than its
standard. Hence, the project is accepted.
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PROFITABILITY INDEX:
Yet another time- adjusted method of evaluating the investment proposals is the
benefit- cost(B/C.) ratio or profitability index (PI) Profitability Index is the ratio of the
present valued ofcash inflows, at the required rate of return, to the initial cash out flow of
the investment.
PV of cash inflow
P I =
Initial Cash outlay
Where PV: Present Value
PROFITABILITY INDEX
YEAR EAT DEPRECIATION CASH IN FLOW (RS
lakhs)
1 12573363.72 16089603.00 286629336.72
2 12573363.72 19701376.88 32274740.60
3 22733566.67 39089995.71 61823562.38
4 47015367.90 40369036.00 87384430.90
5 98786932.00 52675282.00 151462214.00
= 307637088.95
254955806.95
= 1.21
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Criteria for evaluation:
A project can be accepted if its Profitability Index is greater than one. If the PI is
less than one we should reject the project.
Decision:
Profitability index of proposed expansion project is found our 1.21 this is more than the
cash outflow. Hence we accept the project.
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P.I> 1= Accepted
P.I < 1= Rejected
P.I = 1= Indifferent
FINDINGS
1. From the analysis it was observed that the payback period is 4.3 years but standard pay
back period by TIRUMALA MILK PROUDCTS PRIVATE LTD is 6 years. The actual
payback period is lower than the standard set by the company management because of
high yield from the investment as well as higher cash inflows during the initial years of
capital investment period
2. The study results reveals that Average rate of return is fixed by the TIRUMALA
MILK PROUDCTS PRIVATE LTD 21%. But the actual ARR is 20.00%. The actual
ARR is lower than TIRUMALA MILK PROUDCTS PRIVATE LTD. Because the
capital investment required is very low investment required is very low investment, by
TIRUMAL MILK PRODUCTS PVT LTD.
3. It was observed that the acceptance rule of net present value during the period of study
a project is accepted if the Net Present Value is positive. The project NPV is -
18162859.61 (lakhs) for a capital expenditure of 254955806.95.
4. It was observed that the project investment yields an internal rate of return of 12%. For
the period of study, which is more than the it's Cost of capital of 14%
5. It was observed that the profitability index of the proposed expansion project is more
than one. Due to thee positive NPV. Than the project can be accepted. While P.I is 1.21
lines that is for every One rupee invested is the project yields 1.21 rupees
6. The study needs found that at proposal the company using the payback perid
technique for evaluating its capital as budgeting proposal
SUGGESTIONS
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1. From the study it has been suggested that the company has to maintain the Pay back
period as though it is prevailing at present ten the actual PBP is less than the standard
PBP. So the project is to be accepted.
2. From the analysis it has been suggested that the company has it maintained the
Average rate of return as it is in the present situation. As the actual ARR is less than the
standard ARR so the project is to be accepted.
3. It has been suggested that the company has to maintained positive NPV value. As
the NPV is positive the project is to be accepted.
4. It has been suggested that the company has to maintained the IRR as it is the present
situation while calculating the IRR the cost of capital is taken in to consideration on the
bases of weighted average cost of capital.
5. It has been suggested that the company has to maintain the PI as it is in the present
situation. As the PI is more than 1 due to the Positive the project can be accepted.
6. It has been recommended to adopt the DCF based CBDT for the proposal of
evaluating its capital investment proposals alternatives.
7. The calculated payback period is 4.30 years. But standard payback period was 6
years by TIRUMALA MILK PROUDCTS PRIVATE LTD management.
BIBILIOGRAPHY
REFERENCE:
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FINANCIAL MANAGEMENT: I M PANDEY
ADVANCED ACCOUNTING: R.L, GUPTA, M.RADHA SWANIY
JOURNALS:
ANNUAL REPORT OF TMPDL 2010-11
TMPDLPUBLISHED JOURNALS AND MAGAZINES
THE MANAGEMENT ACCOUNTS JOURNALS
WEBSITES:
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www.financial management.com
www.financinganswers.com
www.notesformba.com
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