A project report on financial appriasal in diversification project at the ugar sugar works limited...

FINANCIAL APPRIASAL IN DIVERSIFICATION PROJECT AT THE UGAR SUGAR WORKS LIMITED, UGAR [ATHANI]”

Table of Contents:Table of Contents:

Particulars Topic

Chapter I Executive Summary

Chapter II Methodology

Chapter III Introduction of Industries

Chapter IV Company Profile

Chapter V Introduction of the product Fragies

Chapter VI Financial Appraisal

Chapter VII Objectives

Chapter

VIII

SWOT analysis

Chapter IX Findings

Chapter X Bibliography

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Chapter I

EXECUTIVEEXECUTIVE

SUMMARYSUMMARY



EXECUTIVE SUMMARYEXECUTIVE SUMMARY

Financial Appraisal of project is one of the most crucial aspect in the

project finance and investment decisions. This analysis is made on an on going

project. It is on the topic “Financial Appraisal on Diversification scheme of

Fragies”. Fragies are sugar cubes in the form of ship.

The analysis is based on the financial statement of the company. The main

financial statement used is Estimated Profit and Loss A/ C.

The financial appraisal of THE UGAR SUGAR WORKS Ltd., is analysed

through 5 years projection/ estimation in respect of Cash flow, Profit and Loss A/C

statement, Cost of project, Cost of Capital, Opportunity Cost, Net Present Value of

project, pay back period and Internal rate of return, sources of finance.

The following were the objectives of the study

1. To know the cost of the Project.

2. Time frame required to complete the Project.

3. Financing Method.

4. Cost of Finance.

5. Human Resource Required.

6. Commercial Business.

a. Preparation of Profit and Loss Account.

b. Preparation of Cash in Flow Statement.

c. Calculation of Net Present Value.

d. Payback Period.

e. Internal Rate of Return.

The methodology that was followed was through Primary and Secondary data



Chapter II

METHODOLOGMETHODOLOG

YY



MethodologyMethodology

The project titled Financial Appraisal of diversification scheme is the

analysis of financial Appraisal of THE UGAR SUGAR WORKS Ltd., Ugar-

Khurd.

For this the reliance was on the primary data and secondary data. The

primary data was collected through personal interview of the staff of Finance

department, HR department, and Project manager. The secondary data was the

estimated P&L A/C prepared by the company for the diversification project.



Chapter III

INTRODUCTIOINTRODUCTION OFN OF

INDUSTRYINDUSTRY



Introduction of IndustryIntroduction of Industry

India has been known as the original home of sugarcane and sugar. Indians

knew the art of making sugar since the fourth century. However the advent of modern

sugar industry in India dates back to mid 1930's when a few vacuum pan units were

established in the sub-tropical belts of Uttar Pradesh and Bihar.

Until the mid 50s, the sugar industry was almost wholly confined to the states

of Uttar Pradesh and Bihar. After late fifties or early sixties the industry dispersed into

Southern India, Western India and other parts of Northern India.

India is the largest consumer and second largest producer of sugar in the

world. The sufficient and well distributed monsoon rains, rapid population growth and

substantial increases in sugar production capacity have combined to make India the

largest consumer and second largest producer of sugar in the world.

The Indian sugar industry has not only achieved the singular distinction of

being one of the largest producer of white plantation crystal sugar in the world but has



also turned out to be a massive enterprise of gigantic dimensions. With over 450 sugar

factories located throughout the country, the sugar industry is amongst the largest

agro processing industries, with an annual turnover of Rs150bn. It plays a major role

in rural development and its importance for India stretches far beyond the role of a

sweetener supplier.

The sugar factories located in various parts of the country work as nuclei for

development of rural areas by mobilizing rural resources and generating employment,

transport and communication facilities. Over 45mn farmers, their dependants and a

large mass of agricultural labor are involved in sugarcane cultivation, harvesting and

ancillary activities constituting 7.5% of the rural population. The sugar industry

employs over 0.5mn skilled and unskilled workmen, mostly from the rural areas.

Since the beginning of planning era, sugar industry operated under a policy of

partial control in 1950-51 and 1951-52, followed by a continuous period of six years

of decontrol between 1952-53 to 1957-58. This policy was followed under the

pragmatic leadership of the then Minister of Food, Shri Rafi Ahmed Kidwai.

However, with his departure, the perception of decontrol was lost.

After alternating between control and decontrol, the government adopted the

policy of partial decontrol in 1967-68 which has since been the mainstay of

government policy except for two short periods of decontrol in the 1970's. Under this

policy, the government procures 40% of production at controlled prices based on the

Statutory Minimum Price for sugarcane, for supply through the Public Distribution

System and the balance 60% is allowed to be sold by the mills in free market subject

to the monthly release mechanism. The details of past government policies for sugar

industry are provided in annexure 1.

The levy quota for sugar mills has been brought down from the peak levels of

70% in 1968-69 to the present levels of 40% as a gradual process of deregulation of

sugar industry.

The number of operating sugar mills in the country has increased from 29 in

sugar year (SY) 1930-31 to 412 by SY1996-97 (sugar year = October 1 st to September



30th). The addition in number of mills was at its peak during seventies when nearly

100 mills were added between 1970 and 1980 to increase the number of operating

units to 300. The development of industry in the past is as given in table below.

The average capacity of the sugar mills in the industry has considerably

moved up from just 644 ton per day in SY1930-31 to 2656 ton per day. But still the

growth in the Indian sugar industry was driven by horizontal growth (increase in

number of units) compared to the vertical growth witnessed in other countries

(increase in average capacity)

Sugar year (Oct-Sept) Number of operating

sugar mills

Average capacity ton crushed per

day

1930-31 29 644

1940-41 148 750

1950-51 139 882

1960-61 174 1172



1970-71 215 1394

1980-81 315 1718

1990-91 385 2088

.

India is the largest consumer (18mn tonnes) and the second largest producer of

sugar after Brazil. The country produced 201 lakh tonnes (20.1mn tonnes), the highest

ever, in 2002-03. But there was a drastic drop in production in the following two

years with just 135.46 lakh tonnes in 2003-04 and 130 lakh tonnes in `04-05. For the

current 2005-06 season, the production is expected to be between 180-185 lakh

tonnes. While the production in Maharashtra is expected to double from 22.3 lakh

tonnes in 2004-05 to 46 lakh tonnes in the coming season, Tamil Nadu, Gujarat,

AndhraPradesh, Karnataka and Uttar Pradesh would also witness a significant rise in

production.

The sugar factories located in various parts of the country work as nuclei for

the development of rural areas by mobilizing rural resources and generating

employment, transport and communication facilities. Over 45 million farmers, their

dependants and a large mass of agricultural labour are involved in sugarcane

cultivation, harvesting and ancillary activities. The industry employs over 0.5mn

skilled and unskilled workmen, mostly from the rural areas.

After alternating between control and decontrol, the government adopted the

policy of partial decontrol in 1967-68 which has since been the mainstay of the

government policy except for two short periods of decontrol in the 1970s. Under the

present policy, the government reserves 10% of the production at controlled prices for

supply through the Public Distribution System (PDS) and the balance 90% is allowed

to be sold by the mills in the free market subject to the Monthly Release Mechanism.

The levy quota for sugar mills has been brought down from the peak levels of 70% in

1968-69 to the present level of 10% through a gradual process of deregulation of the

sugar industry. The Indian sugar industry has always been highly regulated by way of

requirements of essence for setting up or the expanding of the sugar factory



restrictions and control on the sale and dispatches of sugar, fixation of satisfactory

minimum cane price payable, fixation of levy sugar price, restriction on import and

export, restriction on stock holdings and so forth. With the government decision to

liberalize the economy since 1991, some of the restrictions were removed

The number of operating sugar mills in the country has increased from 29 in

1930-31 to 453 in 2002-03. The average capacity of the sugar mills has considerably

moved up from just 644 tonnes per day in 1930-31 to 3343 tonnes per day in 2002-03.

The growth in the Indian sugar industry was driven by horizontal growth (increase in

number of units) compared to vertical growth witnessed in other countries

Indian sugar industry can be broadly classified into two sub sectors, the

organised sector, i.e, sugar factories, and the unorganised sector, i.e, manufacturers of

traditional sweeteners like gur and khandsari. The latter is considered to be a rural

industry and enjoys greater freedom than the sugar mills. The production of

traditional sweeteners gur and khandsari is quite substantial. Gur is unrefined sugar

and khandsari is non-centrifuged sugar. These are mostly used in villages and rural

folk as sweeteners and also as important sources of nutrition. Though the trends

indicate a progressive shift from traditional sweeteners to white sugar over the years,

they still account for about 37% of total sweetener consumption in India.

Since the sugar industry in the country uses only sugarcane as an input, sugar

companies have been established in large cane growing states like Uttar Pradesh,

Maharashtra, Tamil Nadu, Karnataka, Punjab and Gujarat. Maharashtra leads in the

number of sugar mills, which are mainly in the cooperative sector, and also in sugar

production, followed by Uttar Pradesh. The farmer’s cooperatives own and operate

the largest of the industry's total capacity. They are concentrated primarily in

Maharashtra and Eastern Uttar Pradesh. The largest number of sugar companies in the

private sector is located in south India, in the states of Tamil Nadu, Karnataka and

Andhra Pradesh. Uttar Pradesh has also some private mills which are operating in a

very large scale. Out of the 453 sugar mills in the country, 269 are in the cooperative

sector, 184 in the private sector and 67 in the public sector. Besides, 136 units in the

private sector are in various stages of implementation. In India sugar production

follows a 5-7 year cycle. Sugar production increases over a 3-4 year period, reaches a

high, which in turn, results in lower sugar prices. As a result of lower sugar price,

realizations of sugar mills, the sugarcane arrears increase. The increase in sugarcane



arrears results in lower sugarcane production, resulting in lower production for the

next 2-3 years. Because of lower sugar production, the prices shoot up resulting in

increased area under sugarcane cultivation during the next season.

Due to heavy domestic consumption (approximately 18mn tones), India is not

in a position to export sugar in large quantities. This year the export could be around

five lakh tonnes. The export would be primarily the obligation that the importers of

raw sugar would have to fulfil. Moreover, the mills would find it more profitable to

sell in the domestic market rather than export it. Currently, export price for white

sugar is $340-350 a tonne f.o.b (Rs 15,375-15,825). In the domestic market, medium

sugar is ruling at Rs 18,740-19,270 a tonne, while small sugar is quoting at Rs18,110-

18,410.

Chapter IV



COMPANY PROFILE



CompanyCompany ProfileProfile

History and Origin

About sixty years ago Ugar Khurd was a small hamlet in the erstwhile

princely state of Sangli. It was however blessed with two great advantages. On its

south flowed the perennial river Krishna and on the north, was situated the railway

station of Ugar Khurd on the meter gauge line between Miraj and Bangalore, now

changed to broad gauge.

Conditions were ideal for somebody to harness the two advantages and

exploit the fertility of the loamy soil. An abortive attempt was made in late thirties

to start a sugar industry. After that, the then ruler of Sangli invited the late

Dr.S.R.Shirgaokar - who had previous experience of setting up a sugar factory at

Kolhapur, to embark on the unexplored venture which he did with great dexterity

and the slumbering village of Ugar Khurd was transformed into a humming

industrial township in a few years. Today, Ugar is equivalent to a mini city with a

decent sized population and having agriculture concentrated employment

surrounding the sugar manufacturing focused township.

Dr. S. R. Shirgaokar deputed his competent nephew Shri.V. S. Shirgaokar

to purchase a sugar plant from Moholi Sugar Factory in Sitapur District in Bihar

and install it at Ugar Khurd. The Ugar Sugar Works hence found a very competent

navigator in one of its visionaries- Late Shri V.S.Shirgaokar. The 500 TCD plant

was purchased, installed and the first crushing season was started on the 21st of

April, 1942. The crushing capacity of the company underwent further expansion.

(10,000TCD) Presently, the crushing capacity of the organization is 14,000 TCD.

(Ugar, Unit-Tasgaon SSK, Unit-Phalatan)



Present Scenario of The Ugar Sugar Works Ltd:

The present capacity of cane crushing is 10 thousand Metric tones per day.

The work performed during the season period is in the three shifts. First Shift is from

4.00 am to 12.00 pm, second shift from 12.00 pm to 8.00 pm and third shift from 8.00

pm to 4.00 am. The crushing of sugar cane is carried out in two mills known as 33 X

66 (small mill) and 42 X 84 (big mill). The cane carried through bullock carts is

crushed in 33 X 66 and the cane carried through truck and tractors is crushed in 42 X

84. This order will change only if there is any problem to one of the mill.

The sugar is packed in 50 kgs. and 100 kgs. Bags. This sugar bagging process

is fully automatic.

Board of Directors:

1. Mr. Rajendra V. Shirgaokar

2. Mr. Prafulla V. Shirgaokar

3. Mr. Shishir S. Shirgaokar

4. Mr. Baba N. Kalyani

5. Mr. Bapugouda S. Patil

6. Mr. Shrikrishna N. Inamdar

7. Mr. V. Balsubramaniam

8. Dr. Mallappa R. Desai

9. Mr. Madhusudan B. Karmarkar

10.Mr. Manohar G. Joshi

11.Mr. Algonda B. Kage



12.Mr. Deepchand B. Shah

Group of Companies:

1. The Ugar Sugar Works

2. SB Reshellers Pvt. Ltd.

3. Shantaram Machineries Pvt. Ltd.

4. Sadashiva Sugars Ltd.

5. Tara Tiles Pvt. Ltd.

6. The Pavilion Hotel



1. Finance Department

Finance is the most important department in the organization. It plays very

important role in the organization. Finance is the life blood of each and every

business. Management of financing is planning and controlling of firm’s financial

resource.

The finance officer occupies a key position. He is one of the dynamic

members of the top management key, and his role day by day is becoming more

intensive and significant in solving the complex management problems.

The Finance Department is subdivided into three departments as under.

A. Accounts Department

B. Cane Accounts Department

C. Cost and Audit Department

Accounts Department: Deals with day to day financial activities of

maintaining accounts i.e. entry of day to day transactions, issue of cheque,

preparing Trial Balance, Profit and Loss Account, Balance Sheet, maintaining

Bank Accounts, Cash Management, Purchase and Sales Accounts. The books of

account maintained by the company are:

1) Sales records: Sales records are

maintained for each of the sold sugars and other product.

2) Purchase Records: Purchase records are

maintained for the purchase of various items.

3) Expenses Records: The records are

maintained for the purpose to make entry for various expenses incurred in a

particular period of time.



4) Stock Records: Stock records are

maintained to know the levels of stock of various items for the particular

period of time .These are both in terms of rupees and units.

5) Budgets: A budget provides an easy

method of continuous monitoring of activities of the organization. A master

budget, which takes into, accounts all activities of an organization.

Following are the budgets prepared:

i. Budget Profit and Loss A/C.

ii. Budget Trading A/C.

iii. Budget Fund Flow Statement.

iv. Budget Balance Sheet.

v. Sales Budget.

vi. Cash Budget.

vii. Expenses Budget.

Cane Account Department: Deals with the farmers in purchasing cane and

making time to time payment, advance payment, transporting, maintaining the

detail information through Weigh Bridge Department about weight of the cane

while it comes to the factory, maintaining daily report like Crushing Report, Sugar

Bagging Report, Baggasse and other material like Trash, Ash, Sugar, Chemicals

and other raw material in and out.

Cost and Audit Department: The functions of Cost and Audit Department:

1. The internal audition of various areas of each and every department

including revenue and expenditure side.

2. Cost Accounting work of U.S.W. Ltd. Products like sugar, rectified spirit,

denatured spirit, power and Indian made liquor product.

3. Periodical physical checking of following departments about their

inventory books of accounts of the stores, time keeper office etc.

4. Preparation of additional data feedback for management audit committee or

any other department required.



5. Special audit of various departments like Agriculture Department, Account

Department, Time Keeper Office, R & D Department, Civil Construction

Projects, Cane Purchase Department Etc.

6. Checking of Closing Stock Statement.

7. Suggesting remedial actions in case of increased cost.

The software package used in finance department is Tally and Own Created

software by the IT Department.

2. Personnel Department

This department undertakes the activities like Recruitment, Selection,

Labour Welfare Activities, Social Activities. Department holds a meeting once in

a week with Top Management. The department has four different committees.

1. Canteen Committee

2. Work/ Grievance Cell Committee

3. Safety Committee

4. House Keeping Committee

Labour Welfare Activities

o Statutory Provisions:

The Ugar Sugar Works provides the statutory provisions under the

Factories Act 1948 like Safety, Health Awareness, Work Environment,

Lighting, Ventilation, Drinking Water Provision, Spittoon, and Toilet. The

Labour Welfare Officer deals personally with the employee problems may be

related to workplace or personal life of the employee. He councils the

employee or worker personally and try to settle the problem.



Additional Facilities:

Education:

Ugar Sugar Works has contributed whole-heartedly in the field of education, towards the betterment of the residents of this region.

Bal Mandir:

This is a playschool for the young children

Shri Hari Vidyalaya:

Shri Hari Vidyalaya is a school, which is home to over 3000 students. This

school has a curriculum which covers the following mediums of instruction

under the primary and secondary sections :

English Medium

Marathi Medium

Kannada Medium

Shri Hari Vidyalaya Pre-University & Degree College:

This college is operating for a number of years

at Ugar Khurd. It has Arts, Commerce and

Science (first year) faculty’s for a Bachelors

Degree. It houses over a 1000 students



Shri Babukaka Shirgaokar Technical Educational Trusts:

Industrial Training Institute (ITI):

The ITI was started in the year 1994 in

honour of our then MD, Shri Babukaka

Shirgaokar.:

This institute provides technical training in the following disciplines

i. Fitter

ii. Electrician

iii. Instrument Mechanic

iv. Computer Technology Trade

v. Cutting and Sewing

Hospital:

The Dr. Shirgaokar Hospital is very well

equiped in the following areas:



State of the Art Laboratory

X-Ray Units

An Air-conditioned Operation Theatre

Dental and Orthopedic Section

Accommodation for 32 indoor patients (32 beds)

Qualified staff of doctors and nurses to take care of the

patients.

Treatment at subsidized rates

Eye camp every week

Quarters Approximately 132 apartments and 400

quarters provided on rent-free basis.

Biogas

Biogas supplied to workers colony (for 85 quarters at concessional

rate)

Food Grains

Food Grains are distributed to workers free of cost once in a year.

Additionally Ugar’s sugar is provided to shareholders and cane growers at a

well discounted rate.

TV Cable Connection

TV Cable connections are given at nominal charges.

Medical Camp

Organising various types of medical camps viz. Dental, Eye,

Tubectomy, ENT, Diabetic Detection Camp, Blood donation, etc.

Workers Day

Celebrating workers day on 2nd October every year and felicitating the

retired workers and high performers during the year.

Training Programme



Organizing Workers / Staff Training Programme.

Ugar Wartha

Circular of monthly Ugar Magazine.

Alcoholics Anonymous Group Meeting

Conducts the Alcoholics Anonymous meeting for the group of fellows,

who desires to give away drinking through the inter group (self-supported) of

General Service office of Alcoholics Anonymous (India). Meeting held twice

in a week.

Sakhar Shala Project

The non formal school runs for the childrens of the Harvesting

workers(Gabali) during crushing season to bridge the gap of academic year

and to keep touch with education during stay at factory(work) site, with the

help of social organizations like Lions Club & Mahila Mandal.

Shri Vinayakrao Shirgaokar Pratishhtann

Provides Education, Loan / Medical Aid.

Dr. Shirgaokar Educational Trust

Provides Education, Loan & Scholarships to the workers children

- 17 -



Awards:

Shri S V Parthasarathy's Award for

outstanding performance in sugar

industry for the

season 1984-85

National Safety Award

1984 for largest Accident

free Period

Social Activities

Arranges Camps like “Netra Shibir”, Dental Camp, Arrangement of Place,

Water and other necessary things at the time of Laxmi Yatra once in a year.

Provides donations for other religious works, educational institutes, and sufferers

of natural calamities.

3. Information Technology (IT) Department:

IT Department distinct The Ugar Sugar Works from other sugar factories.

It has its own IT Department, which is very well developed. This department

develops the software as per the requirements of the different departments. It

efficiently solves any technical problem related to the computer hardware as well

as software in the different department. Various qualified and efficient hardware

and software engineers are there in this department.



4. Purchase Department:

This department accepts the requisitions from the different departments, in

which the material needed, quality and quantity is mentioned. They have the

vendors list and they ask quotations from them. Finally after receiving the

quotation they place the order to appropriate vendor. The purchase order has four

copies. From that one has sent to Accounts Department, one to the Vendor, one to

the department from which the requisition is received and last is retained with

themselves for reference. This department work according to the Just In Time

method. Means it does not blocks the funds of the company.

Purchase Department does not place orders for capital goods. It deals with

the materials, which are necessary to run day-to-day activities of production,

stationary material etc.

This department uses the software developed by their IT department from

FoxPro for keeping records and placing orders. Also they use the other windows

programs like Ms-Office (Ms-Word, Ms-Excel, Ms-PowerPoint) for

documentation.

5. Issue Department

This department is also known as Stores Department. The material

purchased from Purchase Office first comes to the stores department. Here the

stores incharge records the transactions means takes the stock and files the

documents received from the vendor and purchase office. Then this department

supplies or issues the material to other departments according to their need or

requisition.



6. Production Department

The Ugar Sugar Works Ltd, production department comprises the Factory

Manager with his team of Engineers and Operators. He reports to the chief i.e.

works manager. Here the main production is sugar. For producing the sugar there

is a very vast process. Engineers and operators do this process. Here one more

small but very important process joins to the process of producing sugar i.e.

chemical mixing into the cane juice. For this there is a small department called

chemical department. Then after this all process the final product i.e. Sugar

produces. Within all this some by products are also obtained like baggase,

molasses, steam etc. The production department does all above-mentioned

process. Sugar bagging i.e. production of sugar for the last season i.e. 2005-06 is

7. Cane Purchase Office Department

This department deals in purchasing cane from farmers for sugar

production. It maintains all the details of the farmer and the cane also. In these

details they mention the type of sugar cane, area, farmer name, transporter name,

no. of kilometers the place or farm is from factory etc. Then they make a bond

with the farmer for giving the cane to the factory and lastly issue the Cane

Purchase Order to the farmer.

8. Research and Development Department (R&D)

This is one of the most important department in the Ugar Sugar Works Ltd.

The company carries the research and development in Sugar cane, process

modification for sugar production, quality liquor and Ethanol production,

Improvement in Technology, Co-Generation and bio-methanation from press mud

and zero effluent discharge system. This results in Product improvement, cost

reduction, product development, import substitution etc.



Sugar Cane: The main objective of the Research and Development team is to

make continuous effort to find out dual purpose sugarcane varieties with high

sucrose, high yielding potential and reasonably high fibre content. There are 40

odd new sugarcane varieties under trial in this department.

Short Duration Crops: The work with wheat, soybean and sunflower is

reasonably successful as rotation of crops and useful indications are likely to be

obtained.

Future Plans of Action:

a) To popularize the technique of using Wormi-compost and Boiler ash.

b) Replacement of Muriate of Potash by organic Bio-k, a product of SSP Plant of

concentration. Evaporation and drying system for zero pollution.

c) To locate soybean varieties resistant to rust.

d) To find out effective biological measures, which would cause no ecological

problems and shift from the paradigm of pesticidal control to biological control

so as to successfully combat white Woolly Aphid trouble (Ceratovacuna

lanigera Zehnt) with conobartha aphidivora (Dipha), Micromus Sp.(Brown lace

wing) and syrphidfly.

e) To identify multipurpose cane varieties, which can give good yields, good

recoveries, high fibre and resistant to insect pests.

f) To utilize Moist Hot Air Treatment Plant (MHAT) to prolong the life of

productive good cane varieties.

g) To establish Leaf Sheath Moisture, Soil and Plant Tissue Culture Laboratory.

h) Replacing 50% chemical fertilizers with suitable combination of organic and

bio-fertilizers to get the best cane both from the point of quality and quantity.



Different Product Manufactured

The Ugar Sugar Works Limited is the flagship company of the Shirgaokar

Group of Companies. This organization is located in a township by the name-

Ugar Khurd, Karnataka, close to the border of Karnataka & Maharashtra. Ugar

Khurd is nicely located on the banks of the river Krishna.

The main businesses of parent company are manufacturing of:

1. Sugar

2. Power

3. Indian Made Liquor

4. Industrial Alcohol

5. Ethanol

1) Sugar:



The Ugar Sugar Works Limited is the largest ‘single location’ manufacturer

of sugar in Southern India with a licensed capacity of 10,000 TCD. Ugar

manufactures more than 1.5 million bags of sugar annually. The main product of

the sugar manufacturing process is White Crystal Sugar.

This white crystal sugar is manufactured in the following grades :

i. M-30

ii. S-30

iii. SS-30

Byproducts:

Bagasse:

Bagasse is a residual material left after the extraction of juice from sugar

cane. In Ugar Sugar, it is captively used as a fuel by which the industry is self

sufficient for its fuel requirement. The excess is saved to the tune of 5% of

weight of the cane crushed. The saved bagasse can be selectively used as fuel in

the lean period / off-season or sold to the interested parties.

Filter cake:

Filter Cake commonly known as Press mud is the suspended impurities

separated during the process of cane juice clarification by the sulphitation

process. The material is used as manure and the factory manages to sell the

filter cake to the cane growers at concessional rates & achieves recycling of the

matter back to fields.

Final Molasses:



It is a highly viscous left-over material containing sugar / reducing sugar

and organic/inorganic impurities. It is a raw material for distilleries of our

organization.

2) Power :

Cogeneration is a process, which simultaneously produces two or more

forms of useful energy such as electrical power and steam, electric power and

shaft (mechanical) power etc.

Ugar has been a pioneer of cogeneration in the sugar industry in India,

Over the years, The Ugar Sugar Works has reached (in 2-3 phases) a capacity

of 44 MW of power, of which 15 MW is used for captive consumption and the

balance 28 MW is fed to the grid (KPTCL).

Power shortage has made the sugar industry realize that by using high–

pressure Boilers and Turbines from the same amount of input fuel, (i.e. Bagasse)

they can generate up to 2 to 3 times more power and after meeting the captive

requirements, the surplus power can be exported to the grid.

A sugar factory requires both electrical power & process steam for its

operation. With the Indian Government announcing various fiscal incentives for

the use of non-conventional renewable energy for cogeneration in sugar factories,



it has become a viable proposition to adopt high pressure & efficient boilers using

bagasse to generate steam & power economically to make available surplus power

for export to the grid.

This is the single largest cogeneration plant in all of India using non-

conventional energy sources i.e. bagasse and trash. Our group has now started

consulting to sugar industries in India as well as in overseas through our group

company - Ugar Power Generation Consultants Pvt. Ltd (UPGCL). The focus of

this new outfit revolves around consulting on new co-generation projects,

equipment procurement, erection & implementation right up to final

commissioning in the cogeneration sector.

Lots of steps have also been taken by the organization to ensure maximum

conservation of energy.

3) Indian made Liquor:

Ugar currently has two distilleries in premises at Ugar Khurd. The first one

is an old distillery of capacity 30,000 LPD, while the second one is a newly

constructed distillery from Praj Industries, Pune having a capacity of 45,000 LPD.



The Praj Distillery runs on the continuous fermentation technology. The whole

unit of distillation process is having material of construction in copper, which

gives a very good quality of spirit. This plant is having a high level of

computerization and automation.

Two distilleries with a total capacity of 75,000 bulk liters per day.

The primary products coming out of the distilleries are:

i. Rectified Spirit

ii. Indian Made Liquors

iii. Absolute Alcohol (Ethanol)

iv. Arrack

v. Industrial Alcohol

Some of the well-known brands in the marketplace are Old Castle Premium

Whisky, Old Castle Rum, US Rum, US Whisky, Vatted Malt Whisky, Sandpiper

Whisky, Gentlemans Whisky, Ugar Doctors Brandy, Gagarin Vodka and US Gin.

New Projects & Growth

Sugar Ship EOU



EOU for the Manufacture of Sugar Cubes in the form of Ships. The Ugar

Sugar Works Ltd. Has received approval for setting up a 100% Export Oriented

Unit for the manufacture of sugar cubes in the form of ships at Ugar Khurd.

The Building work is in progress and the machinery will be imported from

M/s. Klockner Haensel Processing GMBH Germany (JV Partner) who will be

providing the necessary technology. The machinery is expected to be installed

between March 2006 & July 2006 and commercial production will begin from

August 2006.

The entire production of sugar ships will be exported to Fragies

Verwaltung GMBH, Germany, who have agreed to purchase the entire production

of 45,00,000 boxes p.a. for a period of 5 years

Greenfield Project - Sadashiva Sugars Ltd.

Location Nainegali Village, Taluka & District: Bagalkot,

State: Karnataka.It is about 0.5 km from the

NH 13

Land Area The land measuring about 162000 sq. mts shall be

required for the entire factory and administrative

setup.

Main Product White crystal Sugar

By Products a) Cogeneration

b) Power

c) Press-mud

Licenced Capacity Sugar – 2500 TCD (expandable to 5000 TCD)



Cogeneration Power Plant – 15MW

The land acquisition and machinery procurement work is in progress. The

installation of machinery will be completed by the end of 2006 and 2006-07 will

be a trial crushing season for Sadashiva Sugars.

Greenfield Project-Jewargi

Location Malli Village, Taluka: Jewargi, Dist: Gulbarga,

State: Karnataka. It is about 15 kms from Sindagi on

the State Highway No.12

Land Area The land measuring about 162000 sq. mtrs shall be

required for the entire factory and administrative

setup

Main Product White crystal Sugar

By Products a) Cogeneration

b) b) power

c) press-mud

Licenced

Capacity

Sugar – 2500 TCD (expandable to 5000 TCD)

Cogeneration Power Plant – 15MW



The land acquisition and machinery procurement work is in progress. The

installation of machinery will be completed by the end of 2006 and the 2006-07

crushing season will be a trial season for this new project.

Ugar Sugar-Unit Tasgaon SSK

The Ugar Sugar Works-Unit Tasgaon SSK (Leased Plant)

The Company has taken on lease, Tasgaon Taluka Sahakari Sakhar

Karkhana Ltd., Turchi, (Tasgaon). This plant is having a capacity of 2750 TCD per

day. The lease agreement with Tasgaon SSK has been signed for a period of 6

years.

Commercial pro Ugar Sugar-Unit Tasgaon SSK has crushed a total of 2.22

lac MT for the season 2005-06. The total bagging for this season amounts to 2.50

lac quintals.duction has commenced.

Ugar Sugar-Unit New Phaltan Sugar

The Ugar Sugar Works-Unit New Phaltan Sugar W The Company has

taken on lease New Phaltan Sugar Works Ltd., situated at Sakharwad Taluka

Phaltan Dist.Satara. This plant is approximately 100 kms from Pune.orks (Leased

Plant). This plant has a capacity of 1250 TCD. The lease agreement with New

Phaltan Sugar has been signed for a period of seven years. Commercial production

has commenced. Ugar Sugar-Unit New Phaltan Sugar has crushed a total of 1 lac

MT for the season 2005-06.



Chapter V

INTRODUCTIOINTRODUCTIO

N ABOUT THEN ABOUT THE

DIVERSIFICATIDIVERSIFICATI

ONONBabasabpatilfreepptmba.com


“FRAGIES”“FRAGIES”

Introduction about the Diversification ProjectIntroduction about the Diversification Project

“FRAGIES”

The production of new product called “fragies” is a sugar cube in the form

of ship. This unique project is undertaken in the village Ugar-khurd, Dist:-

Belgaum , State:- Karnataka.

The company has entered into a buy-back agreement with the Fragies

Vorwaltung GMBH Germany. The project is unique in itself. It is first time in the

world such a project is undertaken, because the sugar cubes will be introduced in

the form of ship.

What are fragies:- Fragies are a floating and exciting alternative to the

rather dull sugar cubes. To allow easy dosing through their weight is exactly alike,

3 grams.



Fragies are produced of three sugar components of different states of

aggregation. The sophisticated combination makes floatable fudges out of which

the boats are formed.

“Fragies” make the ideal media for any catering, customer client, the

showbiz or the convience sector. It has a appealing look.

The fragies will be introduced in four varieties.

1.Fragies Coffee

2.Fragies Cappuccino

3.Fragies Tea

4.Fragies Taste

The color make the difference so that ‘fragies taste’ comes with an

additional flavour. As an extra effect all four varieties of ‘fragies’ exhibit a

different dissolving speed. The longer they float the more fun in cup of drinking.

By Product

Fragies will not have any by product.

Availability of raw materials, water, power.

1) Raw material:

The plant is located close to the existing sugar factory. The raw material for

fragies is sugar, which is easily and readily available. The raw material i.e. sugar

required is 10% of the production i.e. Rs226.80 lacs.

2) Water:



Ugar Khurd is blessed on its south flowed the perennial river Krishna. The

existing infrastructure at Ugar which caters for the main sugar plant is also

available for this plant.

3) Power:

Power will be drawn from the co-generation plant of the main product.

Market for finished product:

The company has entered into buy-back arrangement with the fragies

Verwaltung GMBH, Germany. The Germany Company has agreed to buy 22.5

Million boxes (i.e. approximately 56.25 lakh Kgs.) within period of five years or

up to achievement of net profit of 3.5 Million euros by the manufacturer whichever

is earlier. The customer will establish the letters of credit for the purchase of the

product.

Technology and Know-how:

The Germany Company has agreed to provide the necessary technology

and Know-how. Kloeckner Hacnsel Processing GMBH, Germany, will supply the

entire machinery. The product will be manufactured as per the specification

provided by the Germany Company.

Packaging of the Product:

Proper packing of fragies is very important. As each fragies consists of just

3 gms. It is very delicate. Importance of this product lies in its shape, design. So

care should be taken that the product is handled carefully. So packaging is of

utmost important. The product will be accepted only up to maximum 2% of

defects.



Packaging will be given on contract basis. One of the company from

Ratnagiri will supply the packaging material.

Rationale of EOU Plant:

1. As it is located very close to the existing sugar plant at Ugar Khurd, the

raw material and power availability is in abundance.

2. The company will also save on transportation cost of raw materials.

3. The company has entered into a technological agreement with the

German company who has also agreed to the buy back the production

for a period of five years.

4. This will be an opening for the company in the field of exports.

5. Sugar fragies being a futuristic and fancy product has an appeal in the

urban area across the world.

Chapter V



Financial AppraisalFinancial Appraisal

Financial Appraisal

Capital Investment includes all the expenditures which are expected to

produce benefits to the firm over a long period of time, encompasses both tangible

and intangible assets. Some companies classify capital expenditure in a manner,

which provides useful information for decision-making.



Which project to be selected is one of the critical decision-making process. It

depends on certain criteria. Identifying financial appraisal of project is one of the

critically important and complex stage. The shareholder wealth maximization goal

states that the management should endeavor to maximize the net present value of the

expected future cash flows to the shareholder of the firm. NPV refers to the

discounted sum of the expected net cash flows.

The shareholder wealth maximization goal reflects the magnitude, timing and

risk associated with the cash flows expected to be received in the future by

shareholders. The NPV is discounted at the rate of cost of capital.

Cost of capital is the minimum expected rate of return. The company must earn, the

minimum return so as to satisfy the shareholders.



Chapter VII

ObjectivesObjectives



Objectives of the Project

7. To know the cost of the Project.

8. Time frame required to complete the Project.

9. Financing Method.

10. Cost of Finance.

11. Human Resource Required.

12. Commercial Business.

a. Preparation of Profit and Loss Account.

b. Preparation of Cash In Flow Statement.


d. Payback Period.

e. Internal Rate of Return.



Introduction

Finance is regarded as the life blood of the business enterprise. This is

because in the modern money oriented economy finance is one of the basic

foundations of all kinds of economic activities.

Decisions with regard to the investment in the current assets and fixed assets

are significant as they determine the size of the firm, financial requirement, extent of

business risks etc.

Investment decision pertains to long term investment is crucial. It is

absolutely necessary that the firm should carefully plan its investment program so that

it may get the finances at the right time and they are put to most profitable use. An

opportune investment decision can give spectacular results. On the other hand an ill

advised and incorrect decision can jeopardize the survival of biggest firm.

1. To Know the Cost of Project:

Cost of the project means the capital expenditure. It includes investment in

fixed assets. The overall cost of this new project is estimated to be Rs.22, 70,00,000

i.e. 384745.76 Euro (1 Euro = Rs.59). The main machinery costs Rs.17, 70,00,000,

which also includes erection cost. The machinery is tailor made. This machinery is

exclusively used for the production of fragies. The machine cannot be alternatively

used for production of any other products. The Germany Company has agreed to

provide the necessary technology and Know-how. Kloeckner Hacnsel Processing

GMBH, Germany, will supply the entire machinery. The cost of ancillary machinery

is Rs.2, 00,00,000. The building cost Rs.3, 00,00,000. The project building is erected

in the premises of present sugar factory. So there is no any addition investment in the

purchase of land. Here we can say that land is efficiently utilized by the organization.



Cost of Project:

Particulars Amount

Main Machinery - 17,70,00,000

Ancillary Machinery - 2,00,00,000

Building - 3,00,00,000

Total Cost of Project - 22,70,00,000

2. Time frame required to complete the Project:

This project has not still started with the production. The erection of the

building and installation of the machinery will be completed by November 2006.

The company has entered into buy-back arrangement with the fragies Verwaltung

GMBH, Germany. The Germany Company has agreed to buy 22.5 Million boxes

(i.e. approximately 56.25 lakh Kgs.) within period of five years or up to

achievement of net profit of 3.5 Million euros by the manufacturer whichever is

earlier.

After five years either the contract may be renewed or the known how will

be registered by the name of Ugar Sugar Works.

3. Financing Method:

One of the important function of finance manager is to assemble required

amount of funds from different sources. Problem of finance is not much felt by the

sole trading organization, partnership firms etc. because they are run on small scale.

But the real financial problem is faced by corporate enterprises, which are operated on

a very large scale. It is necessary to be familiar with different sources of funds for

meeting various financial requirements of an organization. The method of collecting

funds is linked up with the period and the purpose for which funds are required. It is

also necessary to consider the cost of capital before taking any decision relating to the

selection of sources funds supply.

The Ugar Sugar Works Ltd. Is a Public Ltd. Company under private sector.

Public company is a company where the shareholders are more than fifty. Ugar Sugar



Works has 18000 shareholders with share capital of Rs.9 Cr. These shares are listed

in Bombay stock exchange with the face value of Rs.1 each.

As per the Companies Act of 1956 the company is allowed to issue only

equity share. The company cannot issue debentures and preference shares. The

additional fund requirement is fulfilled by borrowings i.e. long-term loans.

A firm’s capital generally consists of own fund and borrowed funds that

represent combine investment in a business. The optimum capital structure is one that

maintains the ideal ratio between different types of securities issued by the company.

For this new project i.e. the production of fragies the company has not issued

any equity shares. It has raised funds through internal/retained earnings i.e. promoters

contribution and borrowings. This unit is 100% export oriented.

Promoters contribution: Promoters contribution is nothing but the retained earnings.

The entire amount of profit is not distributed by the way of dividend to the

shareholders. It is also referred to as self- financing or internal financing or re-

investment. It is nothing but the re-investment of on savings accumulated over the

years by transferring certain portion of the net profit to the reserves of a company.

When the company uses the fund of one unit to the unit, it is known as Intra

Fund Transferring. It is a most economical method of financing. It is an ideal source

of financing for expansion, modernization and diversification. It is neither expensive

nor subject to any legal complications.

Borrowings / Loans: Generally loans are meant to serve the long term financial

purposes of a business concern. Loans represent and advance granted on a separate

account called loan account. Interest is charged on the whole amount sanctioned to

the customers.

The loan is borrowed from Robo Financial Institution, Singapore Branch at

rate of 4.5%. The company will get the loan in the form of Euros, which will be then

converted, into Indian currency. The company has to pay back the loan again in the

form of Euro. As the devaluation of currency is subject to fluctuation the company,

uses forward cover/hedging to avoid risk. After every 6 months this forward

cover/hedging is renewed.



Capital Structure:

Particulars Amount

Borrowing / Loan from Robo International - 14,16,00,000

Promoters Contribution / Internal Fund - 8,54,00,000

22,70,00,000

4. Cost of Financing / Capital:

Cost in simple terms means sacrificing something such as time, money,

material, man hours for the production of goods any other factor, it too has cost.

The project’s cost of capital is the minimum required rate of return on funds

committed to the project, which depends on the riskiness of its cash flows. The

investment project undertaken by a firm may differ in risk, each one of them will have

its own unique cost of capital. Cost of capital determines the suitability of investment

proposals. When a company has before it, two different investment proposal, in order

to select best investment proposal, which will give more return, the calculation of cost

of capital is essential.

Thus the cost of capital is “The Rate that must be paid to obtain funds for

business activities”. It is the minimum rate of return a company earns on its

investment in order to give expected income to the equity shareholders.

Significance of Cost of Capital:

a. Investment Evaluation:

The primary purpose of measuring the cost of capital is its use as a financial

standard for evaluating the investment project. In the NPV method, an investment

project is accepted if it has a positive NPV. The project’s NPV is calculated by

discounting its cash flow by the cost of capital. In the sense, the cost of capital is the

discount rate used for evaluating the desirability of an investment project. In the IRR

method, the investment project is accepted if it has an internal rate of return greater

than the cost of capital.



b. Designing Debt Policy:

The debt policy of a firm is significantly influenced by the cost consideration.

The interest tax shield reduces the overall cost of capital, though it also increases the

financial risk of the firm. In designing the financial policy, that is, the proportion of

debt and equity in the capital structure, the firm aims at maximizing the firm value by

minimizing the overall cost of capital. The cost of capital can also be useful in

deciding about the methods of financing at a point of time.

c. Performance Appraisal:

The cost of capital framework can be used to evaluate the financial

performance of the top management. Such an evaluation will involve a comparison of

actual profitability of the investment projects undertaken by the firm with the

projected overall cost of capital, and the appraisal of the actual cost incurred by the

management in raising the required fund.

Component of Cost of Capital:

The cost of capital consists of different sources of capital.

i. Cost of Equity

ii. Cost of Preference Shares

iii. Cost of Retained Earning

iv. Cost of Debt

i. Cost of Retained Earning:

Undistributed and accumulated profit represents Retained Earning. Retained

Earning is also a source of funds that can be used by a company conveniently without

having to pay any dividend on these funds. Therefore, it is assumed that the source of

finance is cost free. In fact, retained earnings have opportunity cost. The opportunity

cost of retained earning is dividend sacrificed by the shareholders. Had this dividend

been paid to the shareholders, they would have invested on some other company

shares and earned at least a minimum rate of return which is calculated in a similar



manner as the cost of equity capital, without giving effect to income tax and

brokerage cost consideration.

Computation of cost of Retained Earnings:

Kr = Ke ( 1 – t ) ( 1 – b )

Here:

Kr = Cost of Retained Earning

Ke = Cost of Equity

T = Tax Rate

B = Brokerage Rate

Ke = 8%

T = Nil

The project is 100% export oriented so the tax is exempted.B = Nil

Kr = Ke ( 1 – t ) ( 1 – b )

Kr = 8%

ii. Cost Debt Capital:

Cost of debt capital is the rate of return expected by the lenders. It is the rate

of interest and debt advance. Therefore cost of debt is equal to the rate of interest

payable on debt (before tax). Interest payable by the company is subject to tax

deduction. Hence, cost of debt before tax should be adjusted for tax effect.

Computation of cost of Debt after tax:

Kda = kd ( 1 – t )

Here:

Kd = Cost of Debt before Tax

Kda = Cost of Debt after Tax

T = Tax Rate

Kd = 4.5% i.e. the interest rate

T = Nil

The project is 100% export oriented so the tax is exempted.



Kda = kd ( 1 – t )

Kda = 4.5% ( 1 – t )

Kda = 4.5%

Weighted Average Cost of Capital (WACC):

In financial decision making, overall cost of capital known as composite cost

of capital is more useful than specific cost of capital. Overall cost of capital is an

average of the cost of each source of funds employed by the company. Weighted

average method is one of the methods of calculating the overall cost of capital.

WACC is the weighted average of the cost of different sources of finance,

weights being attached on the basis of proportion which each source of finance bears

to the total fund. According to ICMA (London) Weighted Average Cost of Capital is

the average cost of company’s finance weighted according to the proportion each

element bears to the total pool of capital, weighing is usually based on market

valuation current yields and cost after tax.

Weighted Average Cost of Capital plays an important role in determining the

capital structure, because the optimum capital structure lies at that point where

WACC is minimum. In the evaluation of investment project, WACC is considered to

be the minimum rate of return required from a project so as to enable the firm to pay

an expected rate of return to the investors.

Computation of Overall Cost of Capital

Name Capital Proportion Cost of

Capital After

Tax

WACC

Retained Earnings / Promoters

Contribution

8,54,00,000 37.62% 8% = 0.08 3.00%

Borrowings/Debt 14,16,00,000 62.37% 4.5% = 0.045 2.80%

22,70,00,000 100% 5.80%

WACC = 5.80%



Computation of Cost of Debt after Tax.

Kda = kd ( 1 – t )

Kda = 4.5% ( 1 – t )

Kda = 4.5%

Computation of Cost of Retained Earnings.

Kr = Ke ( 1 – t ) ( 1 – b )

Kr = 8%

Working Note:

1. Calculation of proportion of different sources of capital.

8,54,00,000a. Proportion of Retained Earnings =

22,70,00,000

= 37.62%

14,16,00,000

b. Proportion of Debt = 22,70,00,000

= 62.37%

Option II:

The company if totally depends on equity the cost of capital is 8%. Which is

more than WACC.

If the company totally depends upon borrowing the cost of capital is between

8% to 9%, which is again more than the WACC.

Therefore the optimal capital structure is one which has comprises Debt and

Equity. As per the workout the cost of capital is less when the capital structure

consists of different sources, which can be concluded from the above computations.



5. Human Resource Required:

The machinery used for the production of fragies is fully automatic. It

requires maximum 10 skilled employees to control the machinery. It is estimated that

other 35 workers will be needed for packaging and loading of finished product.

Therefore the total workers required are estimated to be 45.

The 10 skilled employees are given special training to handle the machinery.

The expenses incurred for training is 7.5 lakhs. Every year the unit has to incur the

expense of Rs.1.5 lakhs for food hygiene.



6. Commercial Business:

a. Preparation of Projected Profit and Loss Account

Particulars 30/09/06 30/09/07 30/09/08 30/09/09 30/09/10 30/09/11

Income

Gross Sales - 2369.21 2493.90 2493.90 2493.90 2618.60

Less: Excise Duty - - - - - -

Net Sales - 2369.21 2493.90 2493.90 2493.90 2618.60

Expenditures

Raw Materials Consumed - 226.80 226.80 226.80 226.80 226.80

Purchase of traded items - - - - - -

Store spares etc. consumed - - - - - -

Subtotal(A) - 226.80 226.80 226.80 226.80 226.80

Power, Fuel and Water - 184.05 184.05 184.05 184.05 184.05

Repairs and Maintenance - 32.85 32.85 32.85 32.85 32.85

Staff Cost - 37.13 40.84 42.88 42.88 42.88

Depreciation and Amortisation - 292.14 248.08 210.73 179.08 152.25

Subtotal(B) - 546.16 505.81 470.51 438.86 412.03

A + B - 772.96 732.61 697.31 665.66 638.83

Opening WIP - - - - - -

Closing WIP - - - - - -

Cost of Goods Produced - 772.96 732.61 697.31 665.66 638.83

Opening Stock of Finished

Goods

- - 38.65 36.63 34.87 33.28

Closing Stock of Finished

Goods

- 38.65 36.63 34.87 33.28 -

Cost of Production - 734.31 731.63 699.08 667.24 672.11

Gross Profit - 1634.89 1759.27 1794.82 1826.66 1946.49

Admin & Selling Exp - 532.00 540.10 540.10 540.10 548.21

Interest Cost 28.28 50.90 39.59 28.28 16.97 5.66

Operating Profit (28.28) 1052.00 1179.58 1226.44 1269.59 1392.62

Other Incomes - - - - - -



Profit before Tax (28.28) 1052.00 1179.58 1226.44 1269.59 1392.62

b. Preparation of Cash In Flow Statement.

An analysis of cash flows is useful for short run planning. A firm needs

sufficient cash to pay debt maturing in the near future, to pay interest and other

expenses and to pay dividend to shareholders. The firm can make projections of cash

inflows and outflows for the near future to determine the availability of cash.

Cash inflow statement for the year 2007

Particulars Amount

Sales Revenue - 23,69,21,000

Less: Operating Expenses

Raw Materials - 2,26,80,000

Power, Fuel and Water - 1,84,05,000

Repairs and Maintenance - 32,85,000

Staff Cost - 37,13,000

Administration - 5,32,00,000

Interest Cost - 50,90,000

Depreciation - 2,92,14,000

PBT - 10,13,34,000

Add: Depreciation - 2,92,14,000

Cash In Flow - 13,05,48,000




Particulars Amount










PBT - 11,81,59,000


Cash In Flow - 14,29,67,000


Particulars Amount










PBT - 12,28,21,000


Cash In Flow - 14,38,94,000



Cash Inflow Statement for the Year 2010

Particulars Amount










PBT - 12,71,17,000


Cash In Flow - 14,50,25,000

Cash Inflow Statement for the Year 2011

Particulars Amount










PBT - 14,25,90,000




Cash In Flow - 15,78,15,000

CHART SHOWING ESTIMATED ANNUAL CASH FLOWS

020000000400000006000000080000000

100000000120000000140000000160000000180000000

2007 2008 2009 2010 2011

YEAR

CASH

FLO

WS

IN R

S

YEAR

CASH INFLOWS




The reorganization of the time value of money and risk is extremely vital in

financial decision-making. If the timing and risk of cash flows is not considered the

firm may make decisions that may allow it to miss its objectives of maximizing the

owner’s welfare. The welfare of owners would be maximize when wealth or NPV is

created from making financial decisions.

Time Preference for money:

Time Preference for money is an individual’s preference for possession of a

given amount of money now, rather than the same amount at some future time. Most

individuals value the opportunity to receive money now higher than waiting for one or

more periods to receive the same amount.

Three reasons to the individuals time preference for money –

I. Risk – As an individual it is not certain about future cash receipts he/she

prefers receiving cash now.

II. Preference for Consumption – Preference for consumption over future

consumption of goods and services either because of urgency of their present

wants or because of the risk of not been in a position to enjoy future

consumption.

III. Investment Opportunities – Most individuals prefer present cash to future

cash because of available investment opportunities to which they can put

present cash to earn additional cash.

Required Rate of Return :

The time preference for money is generally expressed by an interest rate. This

rate will be positive in the absence of any risk. It may be therefore called the risk free



rate. The required rate of return may also be called the opportunity cost of capital of

comparable risk.

Present Value:

Present Value of a future cash flow (inflow or outflow) is the amount of

current cash that is of equivalent value to the decision maker. Discounting is the

process of determining present value of a series of future cash flows.

Net Present Value:

Net present value of a financial decision is the difference between the present

value of cash inflows and present value of cash outflows. In the NPV method, an

investment project is accepted if it has a positive NPV. The project NPV is calculated

by discounting its cash flow by the cost of capital.

Computation of Net Present Value:

Year Cash Inflow Discount Rate

@ 6%

Present Value of

Cash Flow

I. 13,05,48,000 0.943 12,31,06,000

II. 14,29,67,000 0.890 12,72,40,000

III. 14,38,94,000 0.840 12,08,70,000

IV. 14,50,25,000 0.792 11,48,59,000

V. 15,78,15,000 0.747 11,78,87,000

60,39,62,000

Present Value of Cash Flow = 60,39,62,000

Less: Investment = 22,70,00,000



Net Present Value 37,69,62,000

d. Payback Period

This is traditional method of evaluating the investment project. It is also

known as Pay Off method of Capital Budgeting. Under this method, time required to

recover the original cost of investment through the income, it generates is found out to

measure the suitability of project. In other words, pay back period implies, the

number of years required for capital expenditure to pay for itself. An investment

project the cost of which can be recovered within a shortest period of time can be

adjudged to be an ideal investment project. In order to determine the pay back period,

the net income generated by investment project without depreciation is considered.

Net income after charging tax but before depreciation is determined in order to know

the actual cash generated by a project. Pay back period represents length of time

required to recover the original cost of investment through the cash flows generated

by it.

If the cash flow is constant for all the years the pay back period can be

ascertained with the help of following formula.

Cost of InvestmentPay Back Period =

Net Cash Benefits after Tax

The cash inflow of this project is uneven. So the pay back period is calculated

in the following manner.

Computation of Pay Back Period

Cash Inflow Cash Outflow /



Investment

13,05,48,000 22,70,00,000

14,29,67,000 9,64,52,000

14,38,94,000

14,50,25,000

15,78,15,000

Pay Back Period = 1 Year 8 Month

For Rs. 14,29,67,000 = 12 Months

For Rs. 9,64,52,000 = ?

= 9,64,52,000 * 12 Months14,29,67,000

= 8 Months

e. Internal Rate of Return:

This is one of the discounted cash flow methods of evaluating investment

projects. It is also known as yield method, marginal efficiency of capital method,

time adjusted rate of return method etc. This method gives time value to money by

applying appropriate discount rate to the future cash flows. Internal rate of return

method attempts to find out present value of streams of net cash inflows resulting

from an investment project to equate with the present value of cash outflows.

An appropriate discount rate cannot be found out at stretch. Internal rate of

return is nothing but the rate of earning of an investment project. It is the discounting

rate which equates present value of total net cash inflows resulting from an

investment proposal with the present value of total cash outflows. If the internal rate

of return is higher than the cut off rate the investment project may be accepted,

otherwise rejected. In case of single investment project, if the internal rate of return is

greater than the cut off rate, the project will be accepted and if it is less than the cut

off rate is rejected.



Excess NPV Over Cost Difference BetweenIRR = Lower Rate + of Investment * Lower Rate and

Difference Between NPV Calculate at Higher Rate

& Lower Rate

Higher Rate

Computation of IRR

Computation of IRR Discount Rate @ 6%


@ 6%

Present Value of

Cash Flow

I. 13,05,48,000 0.943 12,31,06,000

II. 14,29,67,000 0.890 12,72,40,000

III. 14,38,94,000 0.840 12,08,70,000

IV. 14,50,25,000 0.792 11,48,59,000

V. 15,78,15,000 0.747 11,78,87,000

60,39,62,000



@ 40%

Present Value of

Cash Flow

I. 13,05,48,000 0.714 9,32,11,000

II. 14,29,67,000 1.224 17,49,91,000

III. 14,38,94,000 1.589 22,86,47,000

IV. 14,50,25,000 1.849 26,81,51,000

V. 15,78,15,000 2.035 32,11,53,000

1,08,61,53,000



Computation Of IRR Discount Rate @ 50%


@ 50%

Present Value of

Cash Flow

I. 13,05,48,000 0.667 8,70,75,516

II. 14,29,67,000 0.444 6,34,77,348

III. 14,38,94,000 0.296 4,25,92,624

IV. 14,50,25,000 0.198 2,87,14,950

V. 15,78,15,000 0.133 2,08,31,580

24,26,92,018



@ 60%

Present Value of

Cash Flow

I. 13,05,48,000 0.625 8,15,92,500

II. 14,29,67,000 0.391 5,59,00,097

III. 14,38,94,000 0.244 3,51,10,136

IV. 14,50,25,000 0.153 2,21,88,825

V. 15,78,15,000 0.095 1,49,92,425

20,97,83,983

Investment = 22,70,00,000

Higher NPV Over Investment = 24,26,92,018

Lower NPV Over Investment = 20,97,83,983

Excess NPV Over Cost Difference BetweenIRR = Lower Rate + of Investment * Lower Rate and

Difference Between NPV Calculate at Higher Rate

& Lower Rate

Higher Rate

IRR = 50% + 1,56,92,018 * ( 60 – 50 )

3,29,08,035



= 50 + 4.76

= 54.76 %

Chapter VIII

SWOTSWOT

ANALYSISANALYSISBabasabpatilfreepptmba.com


SWOT Analysis

Strength:

1. Assured Market: The Market is assured for final Product. Verwaltung

GMBH, Germany will take the final product.

2. Unique Project: The production of sugar cubes in the shape of ship will be

introduced first time in the market.

3. Availability of Raw Material: Sugar is the raw material for the production

of fragies, which is easily available from the existing sugar factory. The plant

will even not face the shortage of power and water, as it is available from the

existing main plant.

Weakness:

1. Employee Requirement: The employees required should be highly skilled

and trained.

2. Maintenance & Repair: For the maintenance and repair of the machinery the

company has to depend on the contracted company.



Threats:

1. Fluctuation: Fluctuation in the foreign currency is the only threat.

Opportunity:

1. International Market: It is the good opportunity to enter in the International

Market.

2. To Nation: It helps nation to earn foreign currency.

Chapter IX



FINDINGSFINDINGS

Findings

Profit & Loss Account:

From the estimated profit and loss account it is estimated that the cost of

production will gradually go on decreasing. The production is almost constant. The

profit will also go on increasing gradually.

Financing Method:

The project is financed through debt and promoters contribution in the ratio of

1.6 : 1. The accepted debt equity ratio is 2 : 1. As the ratio of debt is 1.6 the capital



structure is in good position. The unit in case of need of cash can still borrow the

debt.

Cost of Capital:

The capital structure for this project consists of debt and promoters

contribution. The project has three options of financing.

Option-I. 100% Borrowings. If the project is 100% financed through

borrowings the cost of capital would be between 8% to 9%.

Option-II 100% Equity. If the project is 100% financed through equity the

cost of capital would be 8%.

Option-III. The project is actually financed through borrowings and promoters

contribution. As we have seen in the earlier computation, the overall cost of capital is

5.80% i.e. 6%.

Hence, the cost of capital of the project is less.

Net Present Value:

Net Present Value of this project is 37,69,62,000. As per the acceptance rule

positive NPV is accepted. As the NPV of this project is positive, we can say that the

project can be accepted.

Pay Back Period:

An investment project the cost of which can be recovered within a shortest

period of time can be adjudged to be an ideal investment project. As per the

calculation the pay back period of this project is very short i.e. just 1 year 8 months,

which is very profitable.

Internal Rate of Return:

If the internal rate of return is higher than the cut off rate the investment

project may be accepted, otherwise rejected. In case of single investment project, if

the internal rate of return is greater than the cut off rate, the project will be accepted.



The cut off rate of this project is 6% and IRR is 54%. Hence this project is very

profitable to the company.

Overall we can say that the project will turn to be very profitable to the

company.



Chapter X

BIBLIOGRAPHBIBLIOGRAPH

YY



BIBLIOGRAPHY

1. FINANCIAL MANAGEMENT BY I M PANDEY

2. FINANCIAL MANAGEMENT BY KHAN AND JAIN

3. FINANCIAL MANAGEMENT BY A D BHAT

4. COMPANY WEBSITE

5. MAGAZINES

6. ANNUAL REPORTS


A project report on financial appriasal in diversification project at the ugar sugar works limited...

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