Rationale for the study

As we know, investment decisions are critical for the success of any business firm.

Finance is the backbone of every organization. Thus, for the success of business a

financial Growth of ours we need complete knowledge of transaction required. We not

need to know how money grows but also need to know instant gratification and live the

universal principles of austerity and hard work all of which form the basis of achieving

financial freedom.

We all know that “A Rupee today is more valuable than a Rupee tomorrow” the

entire would of the investment decision revolve around the “Time value concept of

money.”

All of us are aware, the companies prepare capital investment decision and they

follow that budget and they follow that budget throughout of the year in order to make

profit and to reduce cost but most of us don’t know how actually things work. The

objective of the study is to know how to take decisions and how a budget is prepared in

big organizations like Hindalco industries limited. During training of six weeks, I came to

know about how capital decision is prepared in Hindalco industries limited and how

budget is prepared in Hindalco industries limited and how to take investment decision

and analysis expenditure, how these expenditure are controlled. Every organization has

its own method to prepare budget so as to work efficiently and effectively. I also came to

know about how decision process start with the estimation and determination of cost and

benefits associated with different proposals.

In this project, I have performed about decision making and

understanding the investment paten of actives and analysis of capital expenditure .

Organization can be done in many ways and out of those I choose some methods.

By using weighted average cost of capital

By using Net Present Value

By using interest Rate of Return

1

Title of the project

“Capital Budgeting Tools and analysis of Capital Expenditures in Hindalco Industries limited”.

Scope of study

After doing this project, while preparing the project analysis was on how to prepare a capital budget and how to take investment decision and analysis of capital expenditure and how expenditure can be controlled. The different department prepare budget with the using of tools and then finally finance manager take investment decision. And be aware the concept of cost of capital has been used quite often without providing a good deal of explanation about, how it is obtained and learn about the method of calculation component cost of capital and the weighted average cost of capital.

Objective of the study

The main objective of the study is to understand how and from where an organization arranged the funds.

To study about the investment decision and expenditure decisions.

An understanding of the importance of capital budgeting in marketing decisions.

Identify the steps involved in capital budgeting process.

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HINDALCO

An industry leader in aluminium and copper, Hindalco Industries Limited, the metals

flagship company of the Aditya Birla Group is the world's largest aluminium rolling

company and one of the biggest producers of primary aluminium in Asia. A metals

powerhouse with a turnover Rs18856.30 crore. Its copper smelter is the world’s largest

custom smelter at a single location.

Established in 1958, we commissioned our aluminium facility at Renukoot in eastern

Uttar Pradesh, India in 1962. Later acquisitions and mergers, with Indal, Birla Copper

and the Nifty and Mt. Gordon copper mines in Australia, strengthened our position in

value-added alumina, aluminium and copper products.

The growth story for Aditya Birla Group’s flagship company, Hindalco, will remain

inherently Indian. After posting impressive numbers, that saw its consolidated net profit

soaring eight-fold to Rs. 485 crore for the year ended March 31, Hindalco’s management

said they expect domestic demand to post a double-digit growth in the current financial

year. However, the rise in North America and Europe will be modest.

Global aluminium demands fell about 8 per cent in 2009, after the global slowdown hit

demand — especially for raw materials — in the automotive and construction sectors.

But, there is a clear pickup, with demand likely to rise close to 14 Percent in 2010, as

China and India see rapid expansion in their economies.

Aluminium demand in India is very positive because of auto, construction and power

sectors. Even globally, I would be very surprised if aluminium prices come down from

the current levels,” managing director Debu Bhattacharya told reporters. “Copper

demand, too, is rising on the back of power projects.”

3

Hindalco gets about 40% of its India revenue from aluminium, and is trebling capacity in

India to 1.9 million tones by 2013 at a cost of about $5 billion. “Financial closures of all

the three Greenfield projects are on track. In fact, we have invested Rs.5, 000crore

already on the projects, as we are strongly committed to them. We raised Rs.2, 700crore

from our QIP to meet any shortfall in equity funding. As of now, I see no requirement for

any more equity funding,” said Sunirmal Talukdar, group executive president & chief

financial officer, Hindalco.

Novelis, has seen a remarkable turnaround with its adjusted Ebitda (earnings before

interest, depreciation, tax and amortisation) up 55 per cent in FY10 compared to the

previous year. The improved numbers and profitability have been a result of right sizing

operations and higher efficiency management and exploring new applications for

Aluminium rolled product maker Novelis, which Hindalco acquired in 2007, will

primarily see growth in the South American and Asian markets. Novelis will be investing

$150 million in 2010-11 on capital expenditure. Significant chunk of that will be going

into expanding rolling operations in Brazil, which is likely to get completed by late

2012.Aluminium in sectors like auto. Cost-saving exercises also helped. Novelis for

example recycled 40 billion tonnes of used beverage cans (UBCs) in 2009, saving

significant energy costs.

Hindalco overview

History of our company and other corporate matters Our company is a flagship company

of the Aditya Birla Group and was incorpation on December 15, 1958 as Hindustan

Aluminium Corporation Limited under the provisions of the Act. We changed our name

from Hindustan Aluminium corporation Limited to Hindalco Industries Limited on

October 9,1989, as we had expanded our line of products and also proposed to diversify

into allied fields including aluminium foils, steel plant etc. The Equity shares of our

company with face value of Rs.10 each were first listed of BSE. The listing agreement

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was signed with BSE on January 28, 1960. Thereafter, the Equity Shares with Face value

of Rs.10 each were listed on the NSE.

In 1962 we set up collaboration with Kaiser Aluminium and chemicals Corporation,

USA when our integrated Complex at Renukoot came on stream with a smelter capacity

of 20,000 MTPA. It has since grown to become the largest integrated aluminium

producer in India with a smelting capacity of Renusagar power company Ltd.

The company has grown manifold and is managed by board of directors, with Mr. Kumar

Mangalam Birla as the chairman of the board of Directors. Day to day affairs of the

company is managed by professional executives headed by Mr Ratan K. Shah as the chief

Operating Officer.

The dream of the visionary GD Birla to locate an aluminium plant near Rihand

powerhouse comes true. The late Prime Minister, PT. JAWHERLAL NEHRU formally

inaugurated

the plant in January 1963. Going round the extensive work, Pandit ji saw his dream of a

brighter feature of India take shape before his eyes.From the modest beginning giant with

a capacity to produce 345000 tons of aluminium per annum.

Aluminium and Power (Renukoot, U.P.) the company has sales and distribution

network that covers all India and includes five sales offices located in Mumbai,

Delhi,Bangalore,Chennai,Uttar pradesh

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Hindalco business

Hindalco in India enjoys a leadership position in aluminium. The company’s aluminium

units across the country encompass the entire gamut of operations from bauxite mining

alumina refining, aluminium smelting to downstream rolling, extrusion, foils and alloy

wheels , along with captive power plants and coal mines.

The company has significant market share in the entire segment in which it operates. It

enjoys a domestic market share 42 % in primary aluminium, 63 %in rolled product , 20 %

in extrusion,44%in foils and 31%in wheel.

As step towards expanding the market for value added products and sevices. Hindalco

has launched sevelar brands in recent years, which include Aura for Alloy wheel, fresh

rapper for kitchen foil and ever last for roofing sheets. Our exclusive showroom, the

aluminium gallery, seeks to promote Hindalco products to its customers. It is a platform

for the company to showcase quality audience in an appropriate ambience. The exhibits

include products to a quality audience in an appropriate ambience. The exhibits include

products like windows, doors, furniture, ladder, roofing sheets and ceiling and cladding

panels.

Hindalco products are well received not only in the domestic markets, but also in the

international market. The company’s metal is accepted for delivery under the high grade

aluminium contract on the London Metal Exchange (LME). The company export about

17% of its total sales volume of aluminum. The company’s alumina chemical business is

a leader in manufacturing and marketing of specialty alumina and alumina hydrate

products in the country. It has a market share of 90% in the country. These specialty

products find wide usage in diversified industries including water treatment chemicals,

refractory, ceramics, cryolite, glass, filler and plastic, conveyor belts and cables among

others. The company also exports these alumna chemical to over 30 country covering

North American, Western, Europe and the Asian region.

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ALUMINIUM MANUFACTURING IN HINDALCO

Hindalco was among the first few alloy wheels companies to have obtained the ISO/TS

16949 certification to meet the stringent standard in specialty alumina, primary

aluminium and downstream products. A part from being a dominant player in the

domestic market, Hindalco’s products as well accepted in international markets. Exports

account for more than 30% of total sales.

Hindalco’s major products include standard and specialty grade alumina and hydrates,

aluminium ingots, billets,wire rods, flat rolled products, extrusions, foil and alloys

wheels. Hindalco is the world’s largest aluminium rolling company and one of the

biggest producers of primary aluminium in Asia. In India, Hindalco enjoys a ledership

position in specialty alumina, primary aluminium and downstream products.

Hindalco’s major products include standard and specialty grade alumina and hydrates

aluminium ingots, billets, wire rods, flat rolled products, extrusions, foil and alloy

wheels.

The integrated facility at Renukoot (uttar pradesh) houses an alumina refinery and an

aluminium smelter along with facilities for production of semi-fabricated products,

namely, redraw rods, flat rolled products and extrusions. The plant is backed by a co-

generation plant a 742 mw captive powerplant at Renusagar to ensure continuous and

consistent supply of power for smelter and other operations.

# UTKAL ALUMINA INTERNATIONAL LIMITED, ORISSA

A Rs 44 billion( $1 billion) greenfield joint venture with Alcan Inc, of canada in which

Hindalco holds 55% equity. The proposed 1.5 million tonne alumina refinery is to be set

up in Doragurha, Rayagada district of Orissa, sourcing bauxite from the rich reserves of

Baplimali Rayagada.

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# MADHYA PRADESH

A Rs.77 billion($1.7 billion) project for a smelter-power complex in the siddhi district of

madhya pradesh Aluminium smelter capacity of 325,000 tpa supported by a 750 mw coal

based captive power plant. The coal for the power plant will be sourced from Mahan coal

company Ltd., a joint venture between Hindalco and Essar Group for mining of coal from

the Mahan coal block.

# JHARKHAND

A Rs. 78 billion ($1.7 billion) project for a smelter- power complex in the latehar district.

Aluminium smelter capacity of 325,000tpa supported by captive thermal power of 750

mw.

Globally the aditya birla group is :

A metals powerhouse, among the world’s most cost- efficient aluminium and copper

producers. Hindalco-Novelis is the largest aluminium rolling company. It is one of the

three biggest poducers of primary aluminium in Asia, with the largest single location

copper smelter.

No. 1 in viscose staple fibre.

The 4th largest producer of insulators.

The 4th largest producer of carbon black.

The 11th largest cement producer globally, the 7th largest In asia and the 2nd

largest in India.

Among the world’s top 15 BPO companies and among India’s top four.

Among the best energy efficient fertilizer plants.

In India the Aditya Birla Group is:

A premier branded garents player.

The second largest player in viscose filament yarm.

The second largest in the chlor-alkali sectors.

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Among the top five mobile telephony companies.

A leading player in life insurance and assest management.

Among the top three supermarket chains in the retail business.

Beyond Business—The Aditya Birla Group is

Working in 3700 villages.

Reaching out to seven million people annually through the Aditya Birla centre

for community initiatives and rural development, spearheaded by Mrs. Rajashree

Birla.

Focusing on healthcare, education, sustainable livehood, infrastructure and

espousing social causes.

Running 41 schools and 18 hospitals.

Transcending the conventional barriers of business to send out a message that

“WE CARE”.

9

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PRODUCTS PERFORMANCE REVIEW

Hindalco is one of the leading producers of aluminium and copper. Our aluminium units

across the globe encompass the entire gamut of operations, from bauxite mining, alumina

refining and aluminium smelting to downstream rolling, extrusions, foils, along with

captive power plants and coal mines.

Our copper unit, Birla Copper, produces copper cathodes, continuous cast copper rods

and other by-products, such as gold, silver and DAP fertilisers.

Our units are ISO 9001:2000, ISO 14001:2004 and OHSAS 18001 certified. Several units

have gone a step further with an integrated management system (IMS), combining ISO

9001, ISO 14001 and OHSAS 18001 into one business excellence model. We have been

accorded the Star Trading House status in India. Hindalco's aluminium metal is accepted

for delivery under the High Grade Aluminium Contract on the London Metal Exchange

(LME). Our copper quality standards are also internationally recognised and registered on

the LME with Grade A accreditation.

Aluminium

Hindalco's major products include standard and

speciality grade aluminas and hydrates, aluminium ingots, billets, wire rods, flat rolled

products, extrusions and foil. The integrated facility at Renukoot houses an alumina

refinery and an aluminium smelter, along with facilities for the production of semi-

fabricated products, namely, redraw rods, flat rolled products and extrusions. The plant is

backed by a co-generation power unit and a 742 MW captive power plant at Renusagar to

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ensure the continuous supply of power for smelter and other operations. A strong

presence across the value chain and synergies between operations has given us a

dominant share in the value-added products market. As a step towards expanding the

market for value-added products and services, we have launched various brands in recent

years — Everlast roofing sheets, Freshwrapp kitchen foil and Freshpakk semi-rigid

containers.

COPPER

Birla Copper, Hindalco’s copper unit, is located at Dahej

in Gujarat, India. The unit has the unique distinction of being the largest single-location

copper smelter in the world. The smelter uses state-of-the-art technology and has a

capacity of 500,000 tpa. Birla Copper also produces precious metals, fertilizers and

sulphuric and phosphoric acid. The unit has captive power plants for continuous power

generation and a captive jetty to facilitate logistics and transportation. Birla Copper

upholds its longstanding reputation for quality copper cathodes and continuous cast

copper rods by assuring its management processes meet the highest standards. It has

acquired certifications such as ISO-9001:2000 (Quality Management Systems), ISO-

14001:2004

(Environmental Management System) and OHSAS-18001:2007 (Occupational Health

and Safety Management Systems).

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Mines

Hindalco acquired two Australian copper mines, Nifty and Mt.

Gordon, in 2003. The Birla Nifty copper mine consists of an underground mine, heap

leach pads and a solvent extraction and electrowinning (SXEW) processing plant, which

produces copper cathode. The Mt. Gordon copper operation consists of an underground

mine and a copper concentrate plant. Until recently, the operation produced copper

cathode through the ferric leach process.

In 2004, a copper concentrator was commissioned to provide concentrate for use at

Hindalco's operations in Dahej. During FY2009, Mt. Gordon produced 17,815 tonnes of

copper in concentrate. Both Nifty and Mt. Gordon have a long-term life of mine off-take

agreement with Hindalco for supply of copper concentrate to the copper smelter at Dahej.

Cornerstones of growth

Our well-crafted growth and integration hinges on the three cornerstones of cost

competitiveness, quality and global reach. We are also committed to the triple bottom

line accountability of economic, environment and social factors. Care for the community

around our operating units is best exemplified by our deep-rooted social commitment.

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Production profile

The aluminium production process can be categorized into upstream and downstream

activities. The upstream process involves mining and refining of Bauxite to Alumina,

while the downstream process involves smelting, casting and fabrication.

HINDALCO is amongst the best plants in producing the world class Aluminium at the

lowest cost in India.

The production of Aluminium is done in different stages.Normally the stage consists of

conversion of bauxite to alumina. Then alumina is converted into aluminium. The

refineries at Hindalco are well established and cost worthly.They are very efficient and

wastage is very low.

Hindalco refines bauxites primarily obtained from capative mines, to extract

alumina,which is smelted into alumina ingots and are called billets.Hindalco smelts its

entire production of alumina into aluminium and does not engage in alumina trade.

Production of Aluminium can be categorized into two stages:-

# From Bauxite to Alumina

# From Alumina to Aluminium

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Fully integrated operations - Renukoot

Indal synergies provide additional strength and operational flexibility.

15

Hindalco alumina refinery process

Al2O3 (Alumina) to Reduction Plant

16

Reduction plant – process flow chart

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Integrated Operations of Hindalco at Renukoot

Bauxite Mines

Co-Generation Alumina refinery caustic soda from joint ventrue Renusagar Aluminium smelter Aluminium Fluoride(power plant) from j.v.

Semi fabrication plant

Redrow Rod Mills Rolling Mills Extrusion presses

Foils At. Wheel Plant

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Production Capacities

Division Capacity Location Alumina chemicals 1,160,000tpa 700,000tpa(Renukoot)

110,000 tpa (Muri)350,000tpa(Belgaum)

Primary aluminium 445,000tpa 345,000tpa(Renukoot)2,000 tpa (Belgaum)100,000tpa(Alupuram)14,000tpa(Taloja)

Extrusions 42,000tpa 30,000tpa(Renukoot)12,000tpa(Alupuram)

Rolled products 200,000tpa 80,000tpa(Renukoot)45,000tpa(Belur)45,000tpa (Taloja)30,000tpa(Mouda)

Wire Rods 64,000tpa 40,000tpa(Renukoot)10,000tpa(Alupuram)14,400tpa(Mouda)

Aluminium foil 11,000tpa 5,000tpa(silvassa)6,000tpa(kalwa)

Aluminium wheels 300,000pcs SilvassaPower 1087.2mw 741.7mw(Renusagar)

78mw( Renukoot)267.5mw(Hirakud)

Copper cathodes 500,000tpa Dahej

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Vision mission and value

“My objective has been to build a meritocracy… An organization is about people who make it And it would continue to be my focus” Kumar Mangalam Birla Vision To be a premium metals major, global in size and reach, excelling in everything we do, and creating value for its stakeholders. MissionTo relentlessly pursue the creation of superior shareholder value, by exceeding customer expectation profitably, unleashing employee potential, while being a responsible corporate citizen, adhering to our values. Values Integrity: Honesty in every action. Path to excellence Commitment: On the foundation of integrity, doing whatever it takes to deliver, as promised. Passion: Missionary zeal arising out of an emotional engagement with work. Seamlessness: Thinking and working together across functional silos, hierarchy levels, businesses and geographies. Speed: Responding to stakeholders with a sense of urgency.

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Hindalco Today Aluminium has turned out to be the wonder metal of the industrialized world. No other single metal can do so many jobs, so well and so economically. Aluminium’s growth rate is the highest amongst the major basic metals today. Hindalco ranks is the largest Aluminium producer in India, whose more than 58% sale is in value added product and has more than 40% in total market share. The company’s fully integrated aluminium operations consists of the mining of Bauxite, conversion of Bauxite, into alumina, production of primary aluminium from alumina by electrolysis and production of properzi redraw rods, rolled products, extrusions and value added products like foil and wheels at silvassa. Hindalco’s integrated operation and operational efficiency have enabled the company to be one of the world’s lowest cost producers of aluminium. The company’s cost efficiency has helped it to record an outstanding performance in the face of adverse market conditions. Hindalco also owns a large captive thermal power plant at Renusagar that meets the power requirement of the company very effectively. Hindalco currently has aluminium capacity of 3,45,000 MTPA.Ever last, a hindalco brand for aluminium-roofing sheets, offers ideal and economical solutions for all roofing and cladding needs. Hindalco also offers colors-coated and tiled roofing profiles.

Conclusion of company

The company has recorded a strong performance despite the challenging conditions in copper business posed by the falling tariffs as well as production related issues. The success of its cost optimization initiatives at its power plant in hirakud as well as higher operating margins that the company has achieved.The company has also made good progress on the strategic growth projects that will propel it into the league of global majors. Efforts towards obtaining relevant approvals for the expansions are moving at a fast pace.There have been significant developments during the year towards meeting the funding objectives of the same. The strong balance sheet, prudent financial practices as well as expectations of improved operations give the confidence that your company will be able to economically finance its growth plans. On the whole the companyis poised to deliver superior value to its stakeholders on a continuing basis. OBJECTIVE This above report outlines the detailed guidelines,process flows and work steps related to the capital expenditure investment analysis process at HINDALCO INDUSTRIES LIMITED.

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Capital budgeting

Capital budgeting is a financial procedure to ensure that capital is allocated to value

adding opportunities. A capital budgeting/investment proposal should be accepted/

rejected depending on whether it generates, over the life of investment, returns more than

its cost of capital.

Capital expenditure

Whenever we make expenditure that generates a cash flow benefit for more than one

Year, this is a capital expenditure. Capital expenditures often involve large cash outlays

with major implications on the future values of the company.

Additionally, once we commit to making a capital expenditure it is sometimes difficult to

backout. Therefore, we need to carefully analyze and evaluate proposed capital

expenditures.

Investment decisions equire special attention because of the

following reasons

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

endured for a longer period than the consequences of the current operating expenditure. A

firm’s decision to invest in long-term assets has a decisive influence on the rate and

direction of its growth.

Risk: A long-term commitment of funds may also change the risk complexity of the firm.

If the adoption of an investment increases average gain but causes frequent fluctuation in

its earnings, the firm will become more risky. Thus, investment decisions shape the basis

character of a firm.

Funding: Investment decisions generally involve large amount of funds,which make it

imperative for the firm to plan its investment programmes very carefully and make an

advance arrangement for procuring finances internally or externally.

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Irreversibility: Most investment decisions are irreversible. it is difficult to find a market

for such capital items once they have been acquired. The firm will incur heavy losses if

such assets are scrapped.

Complexity: Investment decisions are among the firm’s most difficult decisions. They

are an assessment of future events, which are difficult to predict. It is really a complex

problem to correctly estimate the future cash flows of an investment. Economic, political,

social, and technological forces cause the uncertainly in cash flow estimation

Types of investment decisions

# Expansion of existing business

# Expansion of new business

# Replacement and Modernization

The Three stages of capital budgeting analysis

Capital Budgeting Analysis is a process of evaluating how we invest in capital assets; i.e.

assets that provide cash flow benefits for more than one year. We are trying to answer the

following question:

Will the future benefits of this project be large enough to justify the investment given the

risk involved?

It has been said that how we spend our money today determines what our value will be

tomorrow. Therefore, we will focus much of our attention on present values so that we

can understand how expenditures today influence values in the future. A very popular

approach to looking at present values of projects is discounted cash flows or DCF.

However, we will learn that this approach is too narrow for properly evaluating a project.

We will include three stages within Capital Budgeting Analysis:

! Decision Analysis for Knowledge Building

! Option Pricing to Establish Position

! Discounted Cash Flow (DCF) for making the Investment Decision

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Decision Analysis

Decision-making is increasingly more complex today because of uncertainty.

Additionally, most capital projects will involve numerous variables and possible

outcomes. For example, estimating cash flows associated with a project involves working

capital requirements, project risk, tax considerations, expected rates of inflation, and

disposal values. We have to understand existing markets to forecast project revenues,

assess competitive impacts of the project, and determine the life cycle of the project. If

our capital project involves production, we have to understand operating costs, additional

overheads, capacity utilization, and startup costs. Consequently, we cannot manage

capital projects by simply looking at the numbers; i.e. discounted cash flows. We must

look at the entire decision and assess all relevant variables and outcomes within an

analytical hierarchy. In financial management, we refer to this analytical hierarchy as the

Multiple Attribute Decision Model (MADM). Multiple attributes are involved in capital

projects and each attribute in the decision needs to be weighed differently. We will use an

analytical hierarchy to structure the decision and derive the importance of attributes in

relation to one another. We can think of MADM as a decision tree, which breaks down a

complex decision into component parts. This decision tree approach offers several

advantages:

! We systematically consider both financial and non-financial criteria.

! Judgments and assumptions are included within the decision based on expected

Values.

! We focus more of our attention on those parts of the decision that are important.

! We include the opinions and ideas of others into the decision. Group or team decision-

making is usually much better than one person analyzing the decision.

Therefore, our first real step in capital budgeting is to obtain knowledge about the project

and organize this knowledge into a decision tree. We can use software programs such as

Expert Choice or Decision Pro to help us build a decision tree.

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Option Pricing

The uncertainty about our project is first reduced by obtaining knowledge and working

the decision through a decision tree. The second stage in this process is to consider all

options or choices we have or should have for the project. Therefore, before we proceed

to discounted cash flows we need to build a set of options into our project for managing

unexpected changes. In financial management, consideration of options within capital

budgeting is called contingent claims analysis or option pricing. For example, suppose

you have a choice between two boiler units for your factory. Boiler A uses oil and Boiler

B can use either oil or natural gas. Based on traditional approaches to capital budgeting,

the least costs boiler was selected for purchase, namely Boiler A. However, if we

consider option pricing Boiler B maybe the best choice because we have a choice or

option on what fuel we can use. Suppose we expect rising oil prices in the next five years.

This will result in higher operating costs for Boiler A, but Boiler B can switch to a second

fuel to better control operating costs. Consequently, we want to assess the options of

capital projects. Options can take many forms; ability to delay, defer, postpone, alter,

change, etc. These options give us more opportunities for creating value within capital

projects. We need to think of capital projects as a bundle of options. Three common

sources of options are:

1. Timing Options: The ability to delay our investment in the project.

2. Abandonment Options: The ability to abandon or get out of a project that has gone bad.

3. Growth Options: The ability of a project to provide long-term growth despite negative

Values. For example, a new research program may appear negative, but it might lead to

New product innovations and market growth. We need to consider the growth options of

Projects. Option pricing is the additional value that we recognize within a project because

it has flexibilities over similar projects. These flexibilities help us manage capital projects

and therefore, failure to recognize option values can result in an under-valuation of a

project.

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Discounted Cash Flow

So we have completed the first two stages of capital budgeting analysis: (1) Build and

organize knowledge within a decision tree and (2) Recognize and build options within

our capital projects. We can now make an investment decision based on Discounted Cash

Flows or DCF. Unlike accounting, financial management is concerned with the values of

assets today; i.e. present values. Since capital projects provide benefits into the future and

since we want to determine the present value of the project, we will discount the future

cash flows of a project to the present. Discounting refers to taking a future amount and

finding its value today. Future values differ from present values because of the time value

of money. Financial management recognizes the time value of money because:

1. Inflation reduces values over time.

2. Uncertainty in the future.

3. Opportunity Costs of money.

Capital budgeting projects According to Brealey

Capital Budgeting Techniques: A variety of measures have evolved over

time to analyze capital budgeting requests.  The newer methods use time value of money

concepts.  Older methods, like the payback period, have the deficiency of not using time

value techniques and will eventually fall by the wayside and be replaced in companies by

the newer, superior methods of evaluation.

1.   Net Present Value (NPV)

Using the hurdle rate as the required rate of return, the net present value of an investment

is the present value of the cash inflows minus the present value of the cash outflows.  A

more common way of expressing this is to say that the net present value (NPV) is the

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present value of the benefits (PVB) minus the present value of the costs (PVC). NPV =

PVB – PVC

By using the hurdle rate as the discount rate, we are conducting a test

to see if the project is expected to earn our minimum desired rate of

return.  Here are our decision rules:

If the NPV is: Benefits vs. Costs

Should we expect to earn

at least

our minimum rate of

return?

Accept the

investment?

Positive Benefits > Costs Yes, more than Accept

Zero Benefits = Costs Exactly equal to Indifferent

Negative Benefits < Costs No, less than Reject

Remember that we said above that the purpose of the capital budgeting analysis is to see

if the project's benefits are large enough to repay the company for (1) the asset's cost, (2)

the cost of financing the project, and (3) a rate of return that adequately compensates the

company for the risk found in the cash flow estimates.

Therefore, if the NPV is:

Positive, the benefits are more than large enough to repay the company for (1) the

asset's cost, (2) the cost of financing the project, and (3) a rate of return that

adequately compensates the company for the risk found in the cash flow

estimates. 

Zero, the benefits are barely enough to cover all three but you are at breakeven -

no profit and no loss, and therefore you would be indifferent about accepting the

project. 

27

Negative, the benefits are not large enough to cover all three, and therefore the

project should be rejected. 

2.   Internal Rate of Return (IRR)

The Internal Rate of Return (IRR) is the rate of return that an investor can expect to earn

on the investment.  Technically, it is the discount rate that causes the present value of the

benefits to equal the present value of the costs.  According to surveys of businesses, the

IRR method is actually the most commonly used method for evaluating capital budgeting

proposals.  This is probably because the IRR is a very easy number to understand because

it can be compared easily to the expected return on other types of investments (savings

accounts, bonds, etc.).

Test

Results

Interpretation of Results Next percentage

to be tested?

PVB > PVC The project is expected to

earn more

than the percentage rate

used for the test

A higher rate

PVB < PVC The project is expected to

earn less

than the percentage rate

used for the test

A lower rate

Which Method Is Better:  the NPV or the IRR?

The NPV is superior to the IRR method for at least two reasons:

28

Reinvestment of Cash Flows:  The NPV method assumes that the project's cash inflows

are reinvested to earn the hurdle rate; the IRR assumes that the cash inflows are

reinvested to earn the IRR.  Of the two, the NPV's assumption is more realistic in most

situations since the IRR can be very high on some projects.

Multiple Solutions for the IRR:  It is possible for the IRR to have more than one

solution.  If the cash flows experience a sign change (e.g., positive cash flow in one year,

negative in the next), the IRR method will have more than one solution.  In other words,

there will be more than one percentage number that will cause the PVB to equal the PVC.

3. Payback Period

Since it does not use the time value of money principle, the Payback Period is the

weakest of the capital budgeting methods discussed here.  By definition, the payback

period is the length of time that it takes to recover your investment

Capital Budgeting Analysis

Whenever we analyze a capital project, we must consider unique factors. A discussion of

all of these factors are beyond the scope of this course. However, three common factors

to consider are:

! Compensating for different levels of risks between projects.

! Recognizing risks that are specific to foreign projects.

! Making adjustments to capital budgeting analysis by looking at the actual results

Risk analysis

We previously learned that we could manage uncertainty by initiating decision analysis

and building options into our projects. We now want to turn our attention to managing

risks. It is worth noting that uncertainty and risk is not the same thing. Uncertainty is

where you have no basis for a decision. Risk is where you do have a basis for a decision,

29

but you have the possibility of several outcomes. The wider the variation of outcomes,

the higher the risk. Another way to adjust for risk is to understand the impact of risk on

outcomes. Sensitivity Analysis and Simulation can be used to measure how changes to a

project affect the outcome. Sensitivity analysis is used to determine the change in Net

Present Value given a change in a specific variable, such as estimated project revenues.

Simulation allows us to simulate the results of a project for a given distribution of

variables. Both sensitivity analysis and simulation require a definition of all relevant

variables associated with the project. It should be noted that sensitivity analysis is much

easier to implement since sophisticated computer models are usually required for

simulation.

30

Type of the project

The project is descriptive and analytical in nature

Sampling Plan:

There has been no sampling plan as such as the study involves understanding the various

processes and analyzing them. The study involves the detailed analysis of secondary data

collected from various sources and therefore no sample size and plan has been considered

Data source:

Data has been collected from both primary and secondary source.

Primary source:

Information gathered by interview and discussing with the employees of finance

department and my project guide.

Secondary source

Annual reports

Manuals of finance department

Internal circulation booklets

Internet sites like www.google.com., www.solidconey or @indiatimes.com

31

Data has been collected through literature survey includes the collection of data from

various sources like handbooks. Study materials etc.

Study Conduct

The study has been conducted from information over a period of 3 years from financial

year2006-2007 to 2008-2009

Duration

Period of study during 25th may to 4th August2010.

Assumptions

Year is taken of 360 days

All purchases have been taken as credit purchases and all sales have been taken as credit

sales. In the absence of relevant data the data from Internet site is taken as the relevant

information.

Methods of Quantative analysis

Capital budgeting techniques

Calculation of weighted average Cost of capital

Analysis

For the analysis data were used along with charts and necessary tables. Other than these

different models are used to access the true financial position of the firm. The current

year i.e. 2010 has not been taken into calculation because, at that time of preparation of

this report annual closing accounting of the company was going on.

Interpretation and recommendation

32

After completion of the entire analysis, interpretation and recommendation were made on

the basis of figures and diagrams. Statistical tools like tables, charts are used for

representation of data.

Business decisions that require capital budgeting analysis are decisions that involve in

outlay now in order to obtain some return in the future.This return may be in the form of

increased revenue or reduced costs. Typical capital budgeting decisions include:

Cost reduction decisions

Should new equipment be purchased to reduce costs?

Expansion decisions

Should a new plan, warehouse, or other facility be acquired to increase capacity and

sales?

Equipment selection decision

Which of several available machines should be the most cost effective to purchase?

 Lease or buy decisions

Should new equipment be leased or purchased?

 

Equipment replacement decisions

33

Should old equipment be replaced now or later? The use of modified sensitivity analysis

as it applies to ICO uncertainty in a capital budgeting analysis, consider the potential

purchase of some equipment to be used in a project. The purchase price is known with

certainty to be Rs.60,00,000. The equipment has a useful life of five years and is in the

three-year property class for MACRS tax-depreciation purposes. Shipping and

installation costs are "estimated" to be Rs.10,00,000 and Rs.20,00,000, respectively, and

the equipment has a zero expected final salvage value, five years from now. No

additional "net" working capital is needed. The new equipment will generate estimated

additional annual net operating cash flows, before consideration of depreciation and

taxes, of Rs.30, 00,000 a year for five years. Assuming that the marginal tax rate equals

40 percent, we can estimate the project's relevant incremental cash flows for the "base

case."

IV.A. The Base Case: Net Present Value

Exhibit 2 shows the project's 90,00,000 initial cash outflow under the "base case."

Exhibit 2.The Expected Initial Cash Outflow Equipment cost (certain) = 60,00,000 + Capitalized expenditures:Shipping cost (estimate) = 10,00,000Installation cost (estimate) = 20,00,000 _______________

= Initial cash outlay (ICO) = 90,00,000 = depreciable basis for tax purposes

34

Exhibit 3

shows the expected the incremental future cash flows.Exhibit 3 Expected Incremental Future Cash Flows END OF YEAR (in x10,000s) __________________________________________

1 2 3 4 5

Net change in operatingrevenue, excluding depreciation 300.00 300.00 300.00 300.00 300.00

- Net increase in tax depreciation (299.97) (400.05) (133.29) ( 66.69) -- ___________________________________________________

= Net change in income before taxes .03 (100.05) 233.31 300.00 166.71

− (+) Net increase (decrease) in taxes (40% rate) (.01) 40.02 (66.68) (93.32) (120.00)

____________________________________________________

= Net change in income after tax .02 ( 60.03) 100.03 139.99 180.00

+ Net increase in tax

35

depreciation 299.97 400.05 133.29 66.69 -- ___________________________________________________ ___________________________________________________ = Incremental net cash flow for years 1 to 5 299.99 340.02 233.32 206.68 180.00

.

Exhibit 4 combines the ICO from Exhibit 2 with the annual operating cash flows from

Exhibit 3, resulting in the total expected net incremental cash flows from the project.

Exhibit 4.

Expected Annual

Cash Flows

END OF YEAR (in x10,000s)

0 1 2 3 4 5

Period

Net cash flows

( 900.00) 299.99 340.02 233.32 206.68 180.00

For an estimated initial cash outlay of 90,00,000, the firm expects to generate net cash

flows of Rs(990),299.99 340.020, 233.320, 206.680, and 180 over the next five years.

The firm’s weighted-average cost of capital is 13 percent. Given this "base case" data, the

net present value is 17,920. The typical capital budgeting response to the project's

positive net present value would be to signal project acceptance. However, given the

uncertain estimates for two of the three ICO components, i.e., shipping and installation,

we suggest that the capital budgeting analyst should defer an accept/reject decision until

those uncertain estimates and their multi-year spillover effects are subjected to sensitivity

analysis.

IV.B. Sensitivity Analysis

Sensitivity analysis can be applied to our equipment purchase's uncertain ICO

components to answer a few “what if” questions. What if, for example, our Rs10,00,000

estimate for shipping cost turns out to be higher/lower? And, what if installation is

36

higher/lower than the Rs 20,00,000 we originally thought? To answer those “what if”

questions, we first perform new NPV calculations in which we change our two variables

of concern (shipping and installation) individually by, for example,-30%, -20%, -10%,

+10%, +20%, and +30%. Note that changes in these variables have multiperiodspillover

effects on depreciation, which affects taxes and future cash flows. Thus, the change in the

ICO not only affects the Year-0 cash flow, but it also affects the cash flows in the

subsequent years.

Exhibit 5 compares the estimated NPVs for the different levels of ICOs.

Exhibit 5.Sensitivity analysis for the equipment purchase showing the impact of individual changesin two initial cash outlay components on the project’s net present value (NPV) in crore of Rs. CHANGE IN ORIGINAL INSTALLATION COST -30% -20% -10% Base +10% +20% +30%Resulting NPV 58.93 45.27 31.58 17.92 4.25 ( 9.43) (23.09)

CHANGE IN ORIGINAL SHIPPING COST

-30% -20% -10% Base +10% +20% +30%

Resulting NPV 38.43 31.53 24.75 17.92 11.08 4.25 ( 2.59)From Exhibit 5, we can see that if estimated installation cost were to increase by roughly

13percent or more from the base case, our project’s net present value turns negative. For

shipping cost, however, the increase would need to be roughly 28 percent or more before

the project has a negative net present value.

The data contained in Exhibit 5 can also be presented graphically in an NPV sensitivity

graph –see Exhibit 6. Notice the two “sensitivity lines” in the NPV sensitivity graph. The

“installation cost” line has the steepest slope. Therefore, NPV is more sensitive to equal

percentage changes in that variable than in “shipping cost.” Based on this information,

37

management may want to concentrate more control efforts on the seemingly more critical

“installation cost” variable. It may even want to try and negotiate a fixed-cost price

contract for installation from a third party.

One potential problem with our sensitivity analysis, so far, is that it has looked at

sensitivity “one variable at a time.” We can also judge the sensitivity of NPV to

simultaneous changes in two variables by constructing an NPV sensitivity matrix. Exhibit

7 is one such sensitivity matrix that depicts NPV results for combinations of changes in

our two input estimates – “shipping cost” and “installation cost.” Note that a

simultaneous cost increase approaching 10 percent for both shipping and installation

costs would result in a negative net present value.

38

Exhibit 7.

Sensitivity matrix for the equipment purchase showing the impact of simultaneous

changes in two initial cash outlay components on the project’s net present value

(NPV)

CHANGE IN INSTALLATION COST

CHANGE IN

SHIPPING COST -30% -20% -10% Base +10% +20% +30%

30% 79.44 72.60 65.77 58.93 52.10 45.27 38.43

-20% 65.77 58.93 52.10 45.27 38.43 31.58 24.75

-10% 52.10 45.27 38.43 31.58 24.75 17.92 11.08

Base 38.43 31.58 24.75 17.92 11.08 4.25 (2.59)

+10% 24.75 17.92 11.08 4.25 (2.59) (9.43) (16.25)

+20% 11.08 4.25 (2.59) (9.43) (16.25) (23.09) (29.93)

+30% (2.59) (9.43) (16.25) (23.09) (29.93) (36.77) (43.60)

Sensitivity analysis, as we have seen, provides a useful and easily understood insight into

how project’s NPV responds to a change in one (or more) uncertain ICO input variables.

Thus, the analysis provides insights into the risk-return trade-off for the project. Given

the risk-return profile in Exhibit 7, should the project be taken? In other words, is the

expected NPV of Rs 17,920 worth the risk of two simultaneous 30% cost overruns, which

would result in Rs43, 600 losses? Although there is no theoretically definitive answer, if

39

the possible loss is small relative to the size of the company, then the risk is probably

worth taking, given that the project has positive expected value. If the loss is so large that

it is a “bet the company” proposition, then the board of directors should make the final

decision.

Sensitivity analysis does not provide any absolute rules for deciding whether or not to

accept the project, but it does provide some clear guidelines regarding the need for a

project to be reevaluated. For the project in this example, a re-approval analysis should be

triggered when the combined shipping and installation cost overrun is Rs 26,213 or more,

since this leads to an expected negative NPV.10 In fact, if cost overruns approach Rs

26,213, then the company’s managers should consider possible interventions that might

help salvage the value of the project.

Cost of capital

Determination of cost of capital Hindalco

The term cost of capital is referred to the discount rate that is used in determining the

present value of the estimated future cash proceeds. The cost of capital is used as the

discount rate to calculate the NPV. It is the minimum rate of retrun that a firm must earn

on its investment for the market value of the firm remain unchanged.

The cost of capital of the firm is the composition of several factors, which means that has

its own cost firstly we calculate the specific cost of various components and then and

then we combine them to reach to the overall cost of capital of the firm, which is referred

as weighted average cost of capital of the firm.

Cost of D ebentures

Cost of debt is the after tax cost of long terms fund through borrowings. The funds raised

though debts is in the form of loans and debentures. Hindalco has both short-term and

long-term. It also has current liabilities such has creditors.

40

a. 6.39% Non convertible Debentures of rupees 1 crore each= 100 crore shares.

Tax rate= 22.3%

IP= Interest payable

T=Tax rate

NP= Net Proceeds

IP=10000000 x 6.39/100=639000

639000(1-0.223)/1000000x100

=639000(.0777)/ 10000000 x100

=496503/10000000 x100

=0.0496503 x100

=4.96503%

b. 6.50% NON convertible Debentrues of rupees 0.1 crore each= 250 crore shares.

Tax Rate= 22.3%

IP= Interest payable

T=Tax rate

NP= Net Proceeds

IP=10000000 x 6.50/100=65000

[65000(1-0.223)/10000000] x 100

=65000(0.777)10000000 x 100

=50505 /10000000 x 100

41

= 5.0505%

c. Loans and Borrowings

Total loan taken by firm= 8324.29crore

Total Interest = 669.65crore

= [669.95(1-0.223)/8324.29] x 100

= [669.95(0.777)/8324.29] x 100

= 6.2534%

d. Government of India Bonds

Total GOI bonds= 2039crore

Cost of Bonds= 8%

Weighted Average cost of capital of Debt

In Crores

Particulars Total amt. Propotion Cost Weighted

Cost

Debentures(a)

100 0.092 4.97% 0.45724

Debentures(b)

250 0.0233 5.05% 0.118

Loans

8324.29 0.777 6.25% 4.856

GOI Bonds

2039 0.1903 8% 1.5224

Total

10713.29 100 6.954%

So, the total weighted average cost of DEBT=6.954%

42

COST OF PREFERRENCE SHARES

The cost of preference capital is the annual preference share dividend divided by the net

proceeds from the sale of preference shares. Or we can say that it is the dividend

expected by the preference shareholders. Unlike interest payment on debt, dividend

payable to preference share is not tax deductible.

Number of shares=2032734shares @2Rs.

Interest Rate= 6%

Dividend on preference share= 0.02crore

Dividend tax on preference shares=0.01crore

PD= Payable Dividend

NP=net proceeds

t=dividend tax

Kp= cost of preference share

PD= 2032734 X 6/100

=0.02crore

Dividend on one share= 2 X 6/100

=0.12Rs/share

NP/Share= 2 Rs

Dividend Tax= 50%

Kp=[0.12(1+0.50)/2]X 100

=0.18/2 X100

43

=.09 X100

= 9%

Cost of equity shares

It is the rate at which discount the expected dividends of the firm to determine its share

value. When equity shareholders invest their funds they also expect returns in the form of

dividends. The market value of the shares is the function of the return that the

shareholders may be expected and get. If the company does not meet the requirement of

the shareholders and pay dividends, it will adversely affect the market value of the shares

of the company.

Cost of equity shares of firm

Year Earnings per share

1998-1999 7.16

1999-2000 7.74

2000-2001 8.57

2001-2002 8.67

2002-2003 5.92

2003-2004 8.53

2004-2005 5.92

2005-2006 8.67

2006-2007 8.57

2007-2008 7.74

2008-2009 7.16

44

Dividend growth model

According to this approach the cost of equity capital is calculated on the basis of the

required rate of return in terms of future dividends to be paid on shares.

The formula for calculating it is as follows:

Estimation of growth rate

There exist different methods for the estimation of growth rate of the firm

Internal growth

This approach may be used when the firm has the stable dividend policy. Hindalco’s

payout ratio has fluctuated over the year. But if we see the past 10 years record of the

firm we can say that generally company distribute upto 20% of the total profit not more

than that. And retained 80% of the total profit. In 2006 company retained 85% of the total

profit.

Growth may be calculated by calculating the product of retention ratio and ROE

g=Retention ratio X ROE (year2009)

=0.88 X 0.094

=8.272%

Cost of equity taking into consideration internal growth rate as g

D1 =1.35

Po=55.75(As on 31st march)

Cost of equity = 1.35/55.75+8.272

=10.69%

Past average growth

In practice the growth may be based on past EPS rather than DPS since companies do not

change their DPS frequently with changes in EPS. Thus DPS grows at a slower rate. The

45

average of EPS past growth rates may be used as a proxy for the future growth. There are

two alternatives available for calculating the average.

The arithmetic average: - The arithmetic average EPS growth rate for HINDALCO

(1998-2009)

= (7.74-7.16)/7.16+(8.57-7.74)/7.74+(8.67-8.57)/8.57+(5.92-

8.67)/8.67+(8.53-5.92)/5.92+(13.48-8.53)/8.53+(16.79-13.48)/13.48+(25.52-16.79)/

16.79+(22.23-25.520/25.52+(14.82-22.23)/22.23/10X100

= (0.81+0.1072+0.012-0.317+0.441+0.58+0.25+0.5199-0.13-0.333)/10X100

= 1.211/10X100

= 12.11%

Cost of equity taking into consideration arithmetic average rate as g (growth)

Cost of equity= 1.35/55.75+12.11

= 14.53%

The geometric average: - The geometric average will give a compound average and is

preferable when there is much variability in EPS data. The geometric average EPS

growth for the past 10 years is a follows.

Formula (1+g) n=EPSn / EPSo

Where

n= Number of years

EPSn=EPS of current year

EPSo= EPS of base year

EPSn=14.82

EPSo= 7.74

n=10

1+g=10√14.82/7.74 X100

1+g=10√1.92

46

g=1.0674 – 1

g= .0674 x100

g= 6.74%

Cost of equity taking into consideration geometric rate as g (growth)

Cost of equity = 1.35/ 55.75+6.75

= 9.16%

Estimate of growth rate and cost of equity according to that:

Method Growth rate Cost of equity

Internal growth 8.272% 10.69%

Arithmetic average

12.11% 14.53%

Geometric average

6.74% 9.16%

Growth rate and cost of equity of firm

For different growth rate HINDALCO’s cost of equity is calculated. It varies from 15%

to 10% so on an average we take 12% as the cost of equity of the firm.

Cost of retained earnings

The companies do not generally the entire profits earned by them by way of dividends

among their shareholders. They retain some profits for the future expansion of the

business. The amount retained by the company, if it had been distributed among the

shareholders by way of dividends, would have given them some earnings. The company

has deprived the shareholders of these earnings by retaining the part of profit with it.

Thus the cost of retained earnings is the earnings forgone by the shareholders. Simply

47

stated the opportunity cost of retained earnings may be taken as the cost of retained

earnings. It is equal to the income that the shareholders can earn by placing these funds in

alternative investments.

Weighted average cost of capital of HINDALCO

PARTICULARS TOTAL

AMOUNT

PROPORTION COST WEIGHTE

D COST

Debt 10713.29 0.310814 6.954% 2.1614%

Preference 0.41 0.000012 9% 0.000108%

Equity 170.027 0.0049 12% 0.0552%

Retained earnings 235384.69 0.68424 12% 8.21088%

Total 34468.417 1.00 10.427588%

Interpretation

so, the weighted average cost of capital of the firm is 10.427588% so, on the basis of this

we can say that, if HINDALCO is considering an investment project of average risk that

has a same capital budgeting as HINDALCO, then it can use 10.43% as discount rate to

compute the project’s NPV.

Future investment decisions by HINDALCO

The expansion programme of hindalco industries ltd, the flagship company of the Aditya

Birla Group, is on track, the company management said at a recent press conference in

mumbai. The aluminium major has set a total capital expenditure programme of Rs

48

25000 crore till 2012, by which time its aluminium production capacity would have

surged to 17 lakh tpa from around 5 lakh tpa now.

Hindalco had acquried canadian aluminium product marker Novelis

in 2007 for$ 5.9billion and has also announced investment of $4

billion(Rs19800crore)over three years to expand capacity of India. Novelis has reported a

net loss of $1.8 billion is the 3rd quarter ended 31 December 2008 on largely to a goodwill

loss of $1.5 billion, fallout of the ongoing global meltdown.

Now here as company had decided to raise 25000 crore rupees from the market. They

can raise this money through any of the following options:

#. Company can raise 25000crore from the market in the form of equity share of Re

1 each.

#. Company can raise money through debentures @6.50% of Rs 1000000 each i.e.

company is issuing 25000 debentures.

Now the present capital structure of the firms is:

Total equity share capital 170.027 crore

Dividend on preference share = 0.02crore

Dividend tax on dividend of preference share=50%

Total interest payment by the company to debt=669.65crore at the tax rate of 22.3%

Now on the basis of this we can calculate the point of indifference of the firm.

Total number of new+ old equity share= (170.027+25000)crore

=25170.027crore

Total interest on debt (old+new)= (669.65+1625)crore

=2294.65crore

Calculation:

PLAN 1

(X-669.65)(1-0.223)-0.02(1+.0.50)÷25170.027

PLAN 2

49

(X-2294.65)(1-0.223)-0.02(1+0.50) 170.027

= (X-669.65)(0.777)-0.03÷25170.027=(X-2294.65)(0.777)-0.03÷170.027

= 0.777X- 52.31805-0.03÷25170.027=0.777x-1782.92-0.03÷170.027

= 0.777X-520.35÷25170.027 =0.777X-1782.97-170.027

= 0.777X-520.35÷0.777X-1782.97=25170.027÷170.027

= 0.777X-520.35÷0.777X-1782.97=148.036

= 0.777X-520.35= 115.027X-0.777X

= 63423.20÷114.24=X

= 2305.88crore= X

Interpretation

Now here this shows that at 2305.88crore of EBIT there exists indifference point. Mean

at this point the EPS is same wither the company uses equity its uses just for raising

funds from the market. If firm is expecting EBIT more than the level of

Indifference level them in such a case using plan 1 is more beneficial for the firm.

Because the greater is the level of EBIT than the indifference point the stronger is the

cause of using leveraged financial plan to maximize the EPS of the firm.

50

Finding

The study is basically done to have a deep knowledge about capital budgeting of the hindalco industries limited. Hindalco industries limited is having an appropriate capital budgeting of the organizations.EPS growth rate is 21.84%,it is showing a high safety of the interest of the investors as well as it is increasing the profit of the organization by an average of 24%every year. The way it is helping the organization in giving more and more benefits to the shareholders of the organization. The market price of the share is also increasing day by day. The EPS is getting high day by day last year it was just Rs 25.25 and in 2008 it is Rs24.51 hindalco’s interest coverage ratio is also increasing after FY04. The company raised a major part of its debt by issuing non-convertible debentrues. During my study I identify the approaches to establish appropriate strategic investment decision. 1-Cost of capital and weighted average cost2Calculation of NPV and IRR

Conclusion

In a typical capital budgeting analysis, a project’s initial cash outlay (ICO) is generally

treated as a single, certain cash outflow. However, upon closer inspection, one or more of

the following conditions may hold true in “real life”:

• The ICO may have several cash outflow components – e.g., land, land improvements,

Buildings, machinery and equipment.

• Some of the ICO components may be certain cash flows and some may be

uncertain/risky cash flows.

• Some ICO components may be capitalized, but not subject to tax depreciation (e.g.,

Land) . An outflow like this is already “after-tax” and provides no depreciation tax-shield

51

Benefits that would affect future after-tax operating cash inflows.

• Other ICO components may also be capitalized, but would be subject to tax

depreciation

(E.g., land improvement, buildings, machinery and equipment). These outflows will have

Spillover effects on future operating cash inflows because of their depreciation tax shield.

• Some ICO component flows may occur after time period zero.

Given these “real life” complicating factors involving a project’s ICO, we recommend

that sensitivity testing be applied to uncertain ICO components at the project-evaluation

stage. Based on this sensitivity testing, the firm can then better decide whether to: a)

subject any ICO component estimates to further refining/review; b) remove any ICO

component uncertainty by negotiating a fixed price contract for some service; c)

outsource some in-house, uncertain ICO cost item; or d) accept/reject the project based

on the currently available information. The firm can also identify the critical levels of

cost overruns that should trigger a formal re-approval of the project.

As the conclusion the company has delivered record performance amidst challenging

environment. The company is continuously confidence of delivering superior operating

performance on the back of improving cost of improving cost competitiveness driven by

establishing an appropriate capital budgeting techniques like past average growth rate and

favorable demand condition in the domestic and regional market. The company has

chalked out expansion in alumina and aggressive growth plans in aluminium. The effort

will be supported by robust current operations, a strong balance sheet which is supported

by an excellent proportionate relationship between investment and return.

Therefore the company is confident of success of these efforts in transforming the

company to the league of Global top-10 in the both the metal and deliver superior value

to stakeholders in future.

52

Limitations of study

The following were the limitations that were there during the course of the study:

1. Lack of awareness in concern to the topic amongst the people.

2. At some place approximate figures had been taken as per instruction of company

officers.

3. Place for research is limited.

4. Funds available for the research is limited.

5. Financial Disclosures Company are not sharing more internal information either

on internet or ready to give.

53

The major objective of the study is the proper understanding of capital budgeting and

financial position of HINDALCO and to suggest measures to overcome the shortfalls if

any.

Among all the financial management decisions one of the important decisions is capital

budgeting .Investment decision about debt- equity mix and capital techniques this project

helps in analyzing the capital budgeting of HINDALCO. What is the relationship

between application and source of cash and weighted average cost of capital other than

this the project also analysis the long-term solvency and short-term solvency of the firm

taking global and India market situations in mind with use of ratio analysis because to

analysis the financial position of a firm one of the method is ratio analysis which uses

data from the balance sheet and income statement to produce values that have been easily

interpreted financial meaning.

The firm results shows that the performance of the firm is better in 2008 than in 2009,

and the major reason for this is economy down term during this financial year other than

this the aluminium market is also affected severely due to sharp fall in the LME prices.

But the performance of the company and the EBIT level of the company the highest

relative to domestic and global peers. The company recorded Highest ever-primary

aluminium production this year and become the first indian company to produce more

than 0.5mn tones in a year.

In case of cost of capital of the firm company the debt proportion in the company is low

as compared to shareholders fund and the maximum out came from retained earnings.

The major competitors of Hindalco also have low on loan & borrowing. Since aluninium

seeks is highly vulnerable to fluctuations in LME. So this is the main reason due to which

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companies in this sector avoid using more debt financing. Company has also declared to

raise 25000crore from market in the form of equity shares. So, decision of the firm itself

indicates that company is now trying to increase their equity proportion rather than using

more of debt. Other than this in 2009 end companies 350 crores of debentures and going

to redeemed. so this leads to more increase in the proportion of equity in the total

financial position of the firm.

The future predictions of aluminium industry are positive, as it indicates the increase in

the demand and consumption of aluminium at global level in other than this there are

various emerging sectors also likes automobiles industry where the usage of alunimum

increase with very high pace.

Hindalco provides better return to its shareholders and are having more equity than debt.

Therefore, the company remains in the safety range and is maintaining the balance.

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Business Performance Review

The company has recorded its best ever performance during the fiscal 2008-2009.AluminiumRs.Mn

CopperRs.Mn

TotalRs.Mn

Net sales and operating

EBIT

Capital employed

ROCE(%)

7,600.54

1530.35

22728

10,619.11

627.41

10765

18219.65

2157.76

33493

9.04%

Aluminium businessThe aluminium business demonstrated a stellar performance with # Highest ever alumina and primary aluminium production with over 100%capacity utilization at all operating units. # Highest ever turnover and business profit. # Highest ever EBIT margins at 50%.

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Financial Review and AnalysisHighlights (in Rs. Millions)Particulars FY 2008 FY 2009Net sales and operating revenuesTotal expenditureOperating profitOther income InterestDepreciation

19201015799934011492928065878

18220015814030366636933716454

Profit before tax Extraordinary itemsProvision for current taxProvision for deferred tax Provision for fringe benefits tax

30256---6063876114

26903----47811214113

Profit after taxOperating margins

2860917.06%

2230316.66%

Net Sales and Operating Revenues Net sales and operating revenues for the year 2008-09 in increased by5% YOY on the back of higher aluminium volume, increased VAP tonnage and buoyant prices for both the metals. A large increase in net sales and operating revenues was though negated by a sharp decline in US dollar. Conslidated revenues jumped from Rs.19316 cores to Rs.60013cores, an increase of 211%.This includes NOVELIS’ sale for the 10.5 months from 16th May, 07 to 31st

March.FY09 will see incorporation of full-year NOVELIS results. Other income Other income at Rs 4929 million was higher by 33.2% over the last year largely due to higher pre-tax treasury yield and higher average treasury. Interest The company’s working capital requirement increased significantly on account of. Higher copper prices driven by higher LME. Rising interest rates resulted in higher average cost of borrowing which rose from 7.24% last year to 7.51% this year. Depreciation Depreciation charges were at Rs. 5878 in FY09 against Rs 6380 millions in FY08.

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Taxes Effective tax rate went up to 26.8% to 23%on account of increase in pre-tax profit by 66% over last year and also proportion of income exempt from tax was lower in current year. Profit Net profit increased 12% to Rs 28609 million on account of tax adjustment for earlier year. Cash profit increased from Rs 32,024 million to Rs 34,487 million.

Cash flow analysis (In Rs.million)Particulars FY 2008 FY2009 %Source of cashCash from operating Non-Operating IncomeNet debt InflowsEquity Raised Other treasury investment(net)

21406199642424

3171691

44265507

23%5%

32%40%

Total 6147 13795 100%Application of cashNet capital ExpenditureInvestment in subsidiariesOther treasury investment(net)Interest and finance chargesDividend payout

88829702124668---

96711004193669266

7%84%2%5%2%

Total 6650 13099 100%Increase/(decrease)in cash and cash Equivalents.

(503) 696

Source of cash Cash from operations Lower realizations for aluminium and lower TcRc in copper impacted margins, however cash profit was higher by 8%. This coupled with higher working capital resulted in lower cash flow from operation compared to last year.Non-operating income Cash from non-operating income increased to Rs.691crores as compared to Rs 620crores a year earlier. The increase is on account of higher dividend income and income earned on utilized lone funds which got capitalized.Equity Your company raised Rs4426crores(net of issue expenses) from rights issue for take-out of the bridge loan taken for Novelis acquisition.Other treasury investment(net)

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Treasury investment were liquidated for take-out of the bridge loan take for Noveils acquisition.

Application of cashCapital expenditure The company spent Rs.967crores on various expansion and efficiency improvement projects. Going forwards,this amount is slated to rise considerably as per planned investment are made in planned drownfield and greenfield projects.

Investment in subsidiaries Aggregate invesments, including loans and advances to subsidiaries, amounted to Rs11,004crores.your company infused Rs.10400.37crores into AV mineral(netherlands) BV a SPV created for acquisition of Noveils Inc. and this amount was used by AV Minerals(Netherlands) BV for takeout of the bridge loan taken for Noveils acquisition and servicing of debts on its balance sheet. Investment (Including loans and advances) in utkal alumina rose by rs.317crores.Interest Interest and finance charges paid for the year was almost same as in last year.interest charged to profit and loss account is only Rs.337crorenet of interest capitalized.Dividend Dividend paid including tax on dividend is Rs266crores. We have put in place a permanent capital structure to support our strategic business plan. We successfully took out the bridge of us$3.03billion in November 2008 admist hostile and turbulent marco economic envirnoment. We managed to preserve our balance sheet strength to grow by reducing our leverage while doing so.

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Bibiliography

Books 1. Pandey, I. M. “Financial Management”, Vikas Publisher, New Delhi, 20032. Chandra Prasanna ,“Financial Management” , Tata McGraw-Hill, 2008.3. Khan M.Y. and Jain P.K, “Management Accounting”, Tata McGraw-Hill, 2006

Reports Annual report(2004-2009) Bonus issue bulletin 2006 Capital planning and policy manual Aditya management annual report

Websites

www.wikipedia.org www.adityakiran.com www.hindalco.com

ARTICLES: (Journal)

Value creation other Aditya Birla publication Hindalco magazine

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