capital budjet in vijayamilk

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A study on
“CAPITAL BUDGETING DECISIONS”
With reference to
The Krishna District Milk Producers Mutually Aided Cooperative
Union .Ltd, VIJAYAWADA.
A Project Report Submitted to
Jawaharlal Nehru Technological University, Kakinada in partial
fulfillment of the requirements for the award of the Degree of
MASTER OF BUSINESS ADMINISTRATION
Submitted by
M.P.V.S.SIVADURGAPRASAD
REGD NO:12K61E0054
Under the guidance of
N.SURESH BABU
ASSCOCIATE PROFESSOR
Department of Management studies
DEPARTMENT OF MANAGEMENT STUDIES
SASI INSTITUTE OF TECHNOLOGY & ENGINEERING
((AApppprroovveedd bbyy AAIICCTTEE,, NNeeww DDeellhhii aanndd AAffffiilliiaatteedd ttoo JJNNTTUU,, KKaakkiinnaaddaa))
TTAADDEEPPAALLLLIIGGUUDDEEMM –– 553344110011WW..GG..DDTT..
2013

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DEPARTMENT OF MANAGEMENT STUDIES
CERTIFICATE
This is to certify that the project work entitled, A study on “CAPITAL
BUDGETING DECISIONS” With reference to The Krishna District Milk
Producers Mutually Aided Cooperative Union .Ltd, VIJAYAWADA.
submitted by M.P.V.S.SIVADURGAPRASAD(12K61E0054),, examined and
adjudged sufficient as partial fulfillment for the award of the Master of
Business Administration, by Jawaharlal Nehru Technological University,
Kakinada from SASI INSTITUTE OF TECHNOLOGY&
ENGINEERING Tadepalligudem.
INTERNAL GUIDE HEAD
Department of Management Studies.
INTERNAL EXAMINER EXTERNAL EXAMINER

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DECLARATION
I hereby declare that the project entitled “CAPITAL BUDGETING
DECISIONS” With reference to The Krishna District Milk Producers
Mutually Aided Cooperative Union .Ltd, VIJAYAWADA. is an original
and independent work done by me and has been submitted to the
Department of Management Studies, SASI INSTITUTE OF
TECHNOLOGY & ENGINEERING affiliated to Jawaharlal Nehru
Technological University, Kakinada in partial fulfillment for the award of
degree of “MASTER OF BUSINESS ADMINISTRATION”.
I also declare that this project is the result of my own effort and is not
submitted to any other University for the award of any Degree or Diploma.
Place: M.P.V.S.SIVADURGAPRASAD
Date: REGD NO: 12K61E0054

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ACKNOWLEDGMENT
I take this opportunity to acknowledge, all the people who rendered their valuable advice
in bringing the project to function.
As a part of the curriculum at SASI INSTITUTE OF TECHONOLOGY AND
ENGINEERING, affiliated to JNTUK-Kakinada the project enables us to enhance our
skills, expand our knowledge by applying various theories, concepts and laws to real life
scenario which would further prepare us to face the extremely ‘Competitive Corporate
World’ in the near future.
I express my sincere thanks to Sri. B.VENUGOPALA KRISHNA, Chairman
SASI INSTITUTE OF TECHONOLOGY AND ENGINEERING, Tadepalligudem,
for giving me an opportunity to undertake this project work.
I express my gratitude to Dr. K. BANU PRASAD, Principal, SASI INSTITUTE OF
TECHONOLOGY AND ENGINEERING, Tadepalligudem, for his valuable support
in pursuing my project work.
I would like to express my gratitude to Sri P. RAMAKRISHNA, Head -
Department of Management Studies, SASI INSTITUTE OF TECHNOLOGY AND
ENGINEERING, for permitting me to pursue my project in K.C.P SUGARS AND
CORPORATION LTD.
I owe a deep sense of gratitude to my project guide Sri N.SURESH BABU,
Associate Professor in Department of Management Studies, SASI INSTITUTE OF
TECHNOLOGY AND ENGINEERING, Tadepalligudem, for his cooperation at each
and every stage of my work and for his patience and immense support in completing this
project.
I have tried my level best to put my experience and analysis in writing this report. I
am grateful Mr. S.RAHAMATHULLA Senior Accounts Officer for helping me to learn
and explore many fields.
Finally I wish to express my thanks to all the members of the faculty of
department of Business Administration for their valuable suggestions in bringing out my
project in most successful manner.

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CONTENTS
PAGE NO
CHAPTER – I
INTRODUCTION 1-11
 NEED FOR THE STUDY
 SCOPE OF THE STUDY
 OBJECTIVES OF THE STUDY
 METHODOLOGY OF THE STUDY
 LIMITATION OF THE STUDY
CHAPTER – II
INDUSTRYPROFILE 12-16
CHAPTER – III
PROFILE OF THE ORGANISATION 17-26
CHAPTER – IV
THEORETICAL FRAME WORK 27-40
CHAPTER – V
DATA ANALYSIS & INTERPRETATION 41-66
CHAPTER – VI
FINDINGS & SUGGESTIONS
BIBLIOGRAPHY

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CHAPTER – 1
INTRODUCTION
 NEED FOR THE STUDY
 SCOPE OF THE STUDY
 OBJECTIVES OF THE STUDY
 METHODOLOGY OF THE STUDY
 LIMITATIONS OF THE STUDY

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CHAPTER – II
INDUSTRY PROFILE

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CHAPTER – III
COMPANY PROFILE

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CHAPTER – IV
THEORETICAL FRAME WORK

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CHAPTER – V
DATA ANALYSIS & INTERPRETATION

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CHAPTER – VI
FINDINGS & SUGGESTIONS

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INTRODUCTION
Finance is regarded as “THE LIFE BLOOD OF BUSINESS ENTERPRISE”.
Finance function has become so important that it has given birth to financial management
as a separate subject. So, this subject is acquiring universal applicability. Financial
Management is that managerial activity which is concerned with the planning and
controlling of the firm’s financial resources. As a separate activity or discipline is of
recent origin it was a branch of economics till 1890. Still today it has no unique
knowledge of its own, and it draws heavily on economy for its theoretical concepts.
The subject of financial management is of immense interest to both academicians
and practicing managers. It is of great interest to academicians because the subject is still
developing, and there are still certain areas where controversies exist for which no
unanimous solutions have been reached as yet. Practicing Managers are interested in this
subject because among the most crucial decisions of the firm are those which relate to
finance and an understanding of the theory of financial management provides them with
conceptual and analytical insights.
SCOPE OF FINANCE MANAGEMENT:
Firms create manufacturing capacities for production for goods; some provide
services to customers. They sell their goods or services to earn profits. They raise funds
to acquire manufacturing and other facilities. Thus, the three most important activities of
a business firm are:
 Production
 Marketing
 Finance

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A firm secures whatever capital it needs and employees it (finance activity) in
activities that generate returns on invested capital (production and marketing activities).
A business firm thus is an entity that engages in activities to perform the functions of
finance, production and marketing. The raising of capital funds and using them for
generating returns to the supplies of funds is called the finance function of the firm.
FUNCTION OF FINANCIAL MANAGEMENT
TWO SIGNIFICANT CONTRIBUTION TO THE DEVELOPMENT OF
MODERN THEORY OF FINANCIAL MANAGEMENT ARE:
 Theory of Portfolio Management developed by Harry Markowitz in 1950, which deals
with portfolio selection with risky investment. This theory uses statistical concepts to
quantify the risk-return characteristics of holding a group/portfolio of securities,
investment or assets.
 The theory of Leverage and Valuation of Fire developed by Modigliani and Miller in
1958. They have shown by introducing analytical approach as to how the financial
decision making in any firm be oriented towards maximization of the value of the firm
and the maximization of the shareholders wealth.

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TYPE OF FINANCIAL ACTIONS:
1. The Financial Management of trading or manufacturing firms
2. Financial Management of Financial Institutions.
3. Financial activities relating to investment activities.
INTERNATIONAL FINANCE:
PUBLIC FINANCE:
Functions are broadly classified into three groups. Those relating to resource
allocation, those covering the financing of these investments and these determining how
much cash are taken out and how much reinvested.
 Investment decision
 Financing decision
 Dividend decision
 Liquidity decision
I)INVESTMENT DECISION:
Firms have scarce resources that must be allocated among competitive uses. The
financial management provides a frame work for firms to take these decisions wisely.
The investment decisions include not only those that create revenues and profits (e.g.
introducing a new product line) but also those that save money.

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So, the investment decisions are the decisions relating to assets composition of
the firm. Assets can be classified into fixed assets and current assets, and therefore the
investment decisions can also be bifurcated into Capital Budgeting decisions and the
Working Capital Management.
The Capital Budgeting decisions are more crucial for any firm. A finance
manager may be asked to decide about.
1. Which asset should be purchased out of different alternative options;
2. To buy an asset or to get it on lease;
3. To produce a part of the final product or to procure it from some other supplier;
4. To buy or not an other firm as a running concern;
5. Proposal of merger of other group firms to avail the synergies of consolidation.
Working Capital Management, on the other hand, deals with the Management of
current assets of the firm. Though the current assets do not contribute directly to the
earnings, yet their existence is necessitated for the proper, efficient and optimum
utilization of fixed assets. There are dangers of both the excessive working capital as well
as the shortage of working capital. A finance manager has to ensure sufficient and
adequate working capital to the firm.
II) FINANCING DECISIONS:
As firms make decisions concerning where to invest these resources, they have
also to decide two they should raise resources. There are two main sources of finance for
any firm, the shareholders funds and the borrowed funds. The borrowed funds are always
repayable and require payment of a committed cost in the form of interest on a periodic
basis. The borrowed funds are relatively cheaper but always entail risk.
The risk is known as the financial risk i.e., the risk of insolvency due to non-
payment of interest or non-repayment of capital amount. The shareholders fund is the
main source of funds to any firm.

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This may comprise of the equity share capital, preference share capital and the
accumulated profits. Firms usually adopt a policy of employing both the borrowed funds
as well as the shareholders funds to finance their activities. The employment of these
sources in combination is also known as financial management.
III) DIVIDEND DECISIONS:
Another major area of the decision marking by a finance manager is known as the
Dividend decisions which deal with the appropriation of after tax profits. These profits
are available to be distributed.
NATURE OF THE FINANCE MANAGEMENT:-
The nature of finance management is refers to its relationship with related.
Display like an economics, Accounting and other subject matters. Finance management
and integral part of overall management.
The relation between financial management and other related displain.
Is shown fig.

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Financial Management
(Decision Making Area)
Fig no.1.1
Leads to Wealth Maximization
Capital Budgeting
1.Investment Decision
Working Capital
Cost of Capital
2. Financing Decision
Capital Structure
3.Dividend Decision
4. Financial Statement Analysis
(Risk & Returns)
Other Related Subjects
1. Production
2. Marketing
3. Human Resources
4. Research &
Develop
Related Subjects
1. Economics
 Micro
 Macro
2. Accounting

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THE IDENTIFICATION OF THE RELEVANT GROUPS:
The various groups which may have stakes in the financial decisions making of a
firm and therefore required to be3 considered while taking financial decisions are:
 The shareholders
 The debt investors,
 The employees,
 The customer and the suppliers,
 The public,
 The Government, and
 The Management
OBJECTIVE OF THE FINANCIAL DECISION MAKING
The following two are often considered as the objectives of the financial management.
 The maximization of the profits of the firm, and
 The maximization of the shareholders wealth
MAXIMIZATION OF THE PROFITS OF THE FIRM:
For any business firm, the maximization of the profits is often considered as the
implied objective and therefore it is natural to retain the maximization of profit as the
goal of the financial also.
The profit maximization as the objective of financial management has a built in
favour for its choice. The profit is regarded as yard stick for the economic efficiency of
any form. If all business firm of the society are working towards profit maximization
then the economic resources of the society as a whole would have been most efficiently,
economically and profitably used. The profit maximization by one firm and if targeted
by all, will ensure the maximization of the welfare of the society. So, the profit

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maximization as objective of financial management will result inefficient allocation of
resources not only from the point of view of the firm but also for the society as such.
 It ignores the risk.
 The profit maximization concentrates on the profitability only and ignores the
financing aspect of that decision and the risk associated with that financing.
 It ignores the timings of costs and returns and thereby ignores the time value of money
 The profit maximization as an objective is ague and ambiguous.
 The profit maximization may widen the gap between the perception of the
management and that of the shareholders.
 The profit maximization borrows the concept of profit from the field of accounting
and tends to concentrate on the immediate effect of a financial decisions as reflected in
thus the increase in the profit of that year or in near future.
MAXIMIZATION OF SHAREHOLDER WEALTH:
This objective is generally expressed in term of maximization of the value of a
share of a firm. It is necessary to know and determine as to how the maximization of
shareholders wealth is to be measured.
The measure of wealth which is used in financial management is the concept of
economic value. The economic value is defined as the present value of the future cash
flows generated by a decision, discounted as appropriate rate of discount which reflects
the degree of associated risk. This measure of economic value is based on cash flows
rather than profit. The economic value concept is objective in its approach and also takes
into account the timing of cash flows and the level of risk through the discounting
process.
PROFIT MAXIMIZATION VERSUS WEALTH MAXIMIZATION:
The objective of profit maximization measures the performance of a firm by a
looking at its total profit. The objective of maximization of the shareholders wealth is
operational and objective in its approach. A firm that wishes to maximize the profits may

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opt to pay no dividend and to reinvest the retained earnings, whereas a firm that wishes to
maximize the shareholders wealth may pay regular dividends.
THE CHANGING ROLE OF FINANCIAL MANAGEMENT:
Many changes in the contemporary world, financial management has undergone
significant changes over the years. The financial management has a very limited role in
business enterprise. Finance Manger is responsible only for maintaining financial records,
preparing reports of the company’s status, performance and arranging funds recorded by
company so that it would meet its obligations in time.
Financial Manager as a matter of act was regarded as specializes officers in the
company concerned only with administering sources of funds, he has called upon only
when the company experimental the problem relates the financial managers to locate the
suitable sources for funds and additional funds. The emphasis on decision making has
continued in recent years.
First there was been increased belief the cost of capital producer the required accurate
measurement of the cost of capital.
Secondly, capital has been in short supplies the old interest in the ways of raising funds.
Thirdly, there was has been a continued managerial activity that has led to revealed
interests in takeovers.
Fourthly, accelerated progress in transportation and communication has brought the
countries of the world close together
They in turn have stimulated interest in the international finance.
..

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IMPORTANCE OF FINANCIAL MANGEMENT:
Finance Management is of greater importance on the present corporate world. It
is a science of money, which permits the authorizes to go further.
SIGNIFICANCE OF FINANCIAL MANAGEMENT CAN BE
SUMMARISED AS:
It assists in the assessment of financial needs of industry large or small and
indicates the internal and external resources for meeting them. It assesses the efficiency
and effectiveness of the financial institution in mobilizing individual or corporate science.
It also prescribes various means for such mobilization of savings into desirable
investment channels.
It assists the management while investing the funds in profitable projects by
analyzing the viability of that project through capital budgeting techniques. It permits the
management to safeguard against the interest of shareholders by properly utilizing the
funds procured from different sources and it also regulates and controls the funds to get
maximize use.
INTRODUCTION TO CAPITAL BUDGETING
The term Capital Budgeting means planning for capital assets. The capital
budgeting decision as to whether or not money should be invested in long-term projects
such as an airliner is planning to buy a fleet of jet aircrafts, a commercial bank is thinking
of an ambitious computerization programme. It includes a financial analysis of the
various proposals regarding capital expenditure to evaluate their impact on the financial
condition of the company and to choose the best out of various alternatives. The finance
manager has various tools and techniques by means of which he assists the management
in taking proper capital budgeting decisions.

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DEFINITIONS:
“Capital Budgeting is the process of generating, evaluating, selected from
following a upon the capital expenditure alternatives”.
------> L.J.Gedman.
“Capital Budgeting is the long term planning for making and finance proced
capital outlays “.
-------> Charles.T.Hongra.
“Capital budgeting generally refers to accuring input with long term returns”.
In any growing concern, capital budgeting is more or less a continuous process
and it is carried out by different functional areas of management such as production,
marketing, engineering, financial management etc. All the relevant functional
departments play a crucial role in the capital budgeting decision process of any
organization, yet for the time being, only the financial aspects of capital budgeting
decision are considered to discuss.
The role of a finance manager in the capital budgeting basically lies in the process
of critically and in-depth analysis and evaluation of various alternative proposals and then
to select one out of these. As already stated, the basic objectives of financial management
is to maximize the wealth of the share holders, therefore the objectives of capital
budgeting is to select those long term investment projects that are expected to make
maximum contribution to the wealth of the shareholders in the long run.
FEATURES OF CAPITAL BUDGETING:
The important features, which distinguish capital budgeting decisions in other Day-
to-day decisions, are
 Capital budgeting decisions involve the exchange of current funds for the benefits to
be achieved in future.
 The future benefits are expected and are to be realized over a series of years.
 The funds are invested in non-flexible long-term funds.
 They have a long terms and significant effect on the profitability of the concern.

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 They involve huge funds.
 They are irreversible decisions. They are strategic decisions associated with high
degree of risk.
IMPORTANCE OF CAPITAL BUDGETING:
The importance of capital budgeting can be understood from the fact that an
unsound investment decision may prove to be fatal to the very existence of the
organization.
The importance of capital budgeting arises mainly due to the following:
1. LARGE INVESTMENT:
Capital budgeting decision, generally involves large investment of funds. But the
funds available with the firm are scarce and the demand for funds are exceeds resources.
Hence, it is very important for a firm to plan and control its capital expenditure.
2. LONG TERM COMMITMENT OF FUNDS:
Capital expenditure involves not only large amount of funds but also funds for long-
term or a permanent basis. The long-term commitment of funds increases the financial
risk involved in the investment decision.
3. IRREVERSIBLE NATURE:
The Capital expenditure decisions are of irreversible nature. Once, the decision
for acquiring a permanent asset is taken, it becomes very difficult to dispose of these
assets without incurring heavy losses.

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4. LONG TERM EFFECT ON PROFITABILITY:
Capital budgeting decision has a long term and significant effect on the
profitability of a concern. Not only the present earnings of the firm are affected by the
investments in capital assets but also the future growth and profitability of the firm
depends up to the investment decision taken today. Capital budgeting decision has utmost
importance to avoid over or under investment in fixed assets.
5. DIFFICULTIES OF INVESTMENT DECISION:
The long terms investment decisions are difficult to be taken because
uncertainties of future and higher degree of risk.
6. NATIONAL IMPORTANCE:
Investment decision though taken by individual concern is of national importance
because it determines employment, economic activities and economic growth.

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NEED FOR THE STUDY
The need for the study is as follows:
 Vijaya dairy is big manufacturing unit with varying milk based products
are being produced.
 The requirement of capital for each department is very high in an
organization like Vijaya dairy
 Therefore, I have under taken my study in this organization to understand
the requirements of capital and its effective allocation of resources in
capital budgeting.

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SCOPE OF THE STUDY
The study has been conducted to understand the position of the industry and
various functional areas of the company and their operations. The study mainly focuses
on capital budgeting of company.
Keep in view the accessibility and availability of the data sources 10% has been
chosen for the purpose of study. In this study to know the company’s financial position,
and which amount is capable to investing every year. To study of the profitability of the
company after expansion of the projects This study causes 2007-12 and it is limited only
to the perception of the personal belonging to KSMPCU Ltd,.

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OBJECTIVES OF THE STUDY
The objectives of the study are as follows
 To describe the organization profile of KSMPCU Ltd.
 To discuss the importance of management of capital budgeting.
 Determination of proposal and investments inflows and our follows.
 To evaluating the investment proposals by using capital budgeting techniques.
 To summarize and suggest for the better investment proposals.
.

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METHODOLOGY OF STUDY
The information for the study is obtained from two sources namely.
 Primary Sources
 Secondary Sources
Primary Sources:
It is the information collected directly without any references .it is mainly through
interactions with concerned officers & staff ,either individually or collectively; some of
the information has been verified or supplemented with personal observation. These
sources include.
1. through interaction with the various department managers of Vijay a Dairy.
2. Guidelines give by the project guide ch. Venkateswarlu.
Secondary Sources:
This Data id from the number of books and records of the company the annual report
published by the company and other magazines. The secondary data is obtained from the
following.
Collection of required data from annual record ,monthly records
internal
Other books and journals and magazines
Annual report of the company.

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LIMITATIONS OF THE STUDY
 As the information is highly confidential, the information provided by the
management is limited. Hence some of the conclusions are based on assumptions
that are taken under the guidance team of Vijay a Dairy.
 For evaluation of the project I have followed the guidelines given by the Project
Appraisal Division of the Planning, which are mentioned here after.
 This study is confined only to Finance and Planning departments of Vijay a
Dairy
 Time taken for this study is 6 weeks, which is found to be less, as Capital
Budgeting is a vast topic.
 Tool and Techniques of Capital Budgeting are implemented only under the
Construction stage of Vijay a Dairy.

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PROFILE OF MILK INDUSTRY
The food processing industry is one of the largest industries in India. It is ranked
fifth in terms of production, consumption, export and expected growth.
The industry size has been estimated at US $70 billion by the Government of
India, contributing 6% in total industries production. The industry directly employs 1.6
million people. The food processing industry covers sectors such as agriculture,
horticulture, plantation, animal husbandry and fisheries. It also includes other industries
that use agriculture inputs for manufacturing of edible products. The ministry of food
processing of government of India includes the following as part of the industries.
 Dairy, Fruits & Vegetables processing.
 Grain processing.
 Meat & Poultry processing
 Fisheries.
 Consumer foods including packaged foods, Beverages and packed
drinking water.
While the industry is large in size, it is still at a nascent in terms of development
of the country’s total agriculture and food produce only 2% goes in to processing for
value addition. The highest share of processed food is in the dairy sector, where 37% of
the total produce is processed.
In the dairy sector, most of the processing is done by the UN organized sector.
The share of organized sector is less than 15%; it is expected to rise rapidly. Among the
milk products manufacturing by the organized sector are ghee, butter, cheese, ice-
creams, milk powders malted milk food, condensed milk and infant foods.
CASE INDIA’S FOOD PROCESSING INDUSTRY
The share of the organized and unorganized sectors varies across different
segments of the industries. The industry is estimated to grow at 9.12 % on the basis of an
estimated G.D.P. growth rate of 6 to 8%. Value addition of food products is expected to

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increase from the current 8% to 35% by the end of 2025. Fruit and Vegetable processing
which is currently around 2% of total production will increase to 10% by 2010 and
opening of the retail sector, the food processing sector is a key focus are for the
Government of India.
The importance of the sector is further enhanced by the fact that over 65% of
country’s population depends upon agricultural activity for livelihood. The industry
Government efforts have been to focus on commercialization and value addition of raw
agricultural produce, minimize pre/post harvest wastage, generate employment and
export growth in this sector through a number of regulatory and fiscal incentives.
DAIRY INDUSTRY IN INDIA
The developed countries in the world have recognized the important of live stock
enterprise and have developed around their agriculture, progressive and forward looking
livestock enterprise. The domestication of animal for making the food requirements was
the beginning of the agriculture in the world.
STEPS OF DAIRY DEVELOPMENT
In India, there was no progress in the dairy industry before independence,
Government of India realized the necessity of increasing milk production and by products
there by availing substantial job opportunities to the urban and rural community. The
Government of India has focused much more attention on dairy development
programmed by allocating more funds in the 4th and 5th fine year plans.
The Government of India during 1970 have launched massive programmed via.
Flood 1 and operation flood 2 with the help of European Nations and world production
programmed costing Rs.500 Cores. The Government of India has undertaken various
schemes through organization and institutions viz., India dairy corporation , India Dairy
Development Board, Animal Husbandry Department of all states, private sector,
organization of milk producers, cooperative and dairy plant, national dairy research
institute. These programmed enable for immediate development in dairy activities, dairy
development in our country with the help of effective marketing system.

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OPERATION FLOOD PROGRAME IN INDIA
In order to build a viable and self sustaining national dairy industry and co-
operative lines the NDDB launched a project christened operation flood mobilized from
the sale of products based in foreign food donations in the form of skin milk powder and
butter oil. Operation flood, the largest development programmed undertaken in the world,
was initiated closely on hells.
Green Revolution in the country. Against the back drop of huge surplus of milk
production in the highly developed milk producing countries in the west and dandling per
capita. Milk availability at home with its pledge to provide milk to one all, it was
considered the world’s largest dairy development programmed. It spurred the India dairy
industry to launch a “While Revolution”.
The establishment of milk producers off co-operative societies to link dairy
development with milk marketing formed the central plant of the project which gave into
a vigorous mild co-operative movement under the basis of NDDB. This was a unique
development effort which was initiated at the grass root level-the village-and went up to
the “Dairy Federation” of a state with its operational effectiveness ascending at every
step.
According to the agreement signed by food programmed (W.F.P) and
Government of India the W.F.P will arrange to supply 126000.00 metric tons of butter oil
which the corporation will handle on behalf of the Government utilization of
commodities would generate funds estimated at Rs.954 million during the project period.
These funds are to be investing in the plan of operations agreed by the W.F.P in
Government. The project aims at the improvement of milk marketing I the organized
sector especially in the four major cities extended over ten states I.e., Punjab, Tamil
Nadu, Andhra Pradesh, Maharashtra and Gujarat.

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Phase Operation Flood-1 Operation Flood-2 Operation Flood-3
Ducati On July 1970 To
March 1981
April 1981 To
March 1985
April 1985 To
March 1990
Funds 1165.00 2772.00 6013.00
(Disbursed) (Disbursed) (Disbursed)
Table: 2.1
The important of dairy development in India was recognized internationally in the
holding of the 58th annual session of the international. (I, D.C) at New Delhi in 1974. The
19th international dairy congress was a particular significance to India as its main theme
was “Dairying as an instrument of social and economic change”.
SUBTAINABILITY OF DAIRY MRKETING CO-OPERATIVE
BUSINESS ORGANISATIONS IN NEW ECONOMIC
ENVIRONMENT
Dairy marketing co-operative business organization could be able to achieve
sustainability particularly in the new economic environment, through adopting
professionalization and modern operational management practices and administration.
However, they must be made more sustainable, productive and profitability to
meet the needs of the new economic environment.

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1998-99 63.08(….) 194(----)
1999-00 66.2(3.76) 197(1.55)
2000-01 69.1(4.38) 202(2.54)
2001-02 72.1(4.34) 207(2.50)
2002-03 75.4(4.58) 213(2.90)
2003-04 78.3(3.85) 217(1.90)
2004-05 80.6(3.00) 220(1.40)
20005-06 84.4(4.71) 225(2.30)
2006-07 86.2(2.13) 230(2.22)
2007-08 88.1(2.20) 231(0.43)
2008-09 91.0(3.30) 232(0.43)
2009-10 93.2(3.51) 235(0.32)
2010-11 95.1(3.70) 237(0.26)

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MILK PRODUCTION AND PER CAPITA AVAILABILITY
Provisional: figure in parenthesis indicate growth rate
Source : State/ U.T. Animal Husbandry Department, 2008
It is heartening to note that the milk production and per capital availability of milk
is showing increase trend. The effect and impact of while revolution have been felt in
many milk shed regions of the country. Due to the positive policy changes in the dairy
sector, the country has self sufficiency in milk production.
INSTITUTIONAL SUPPORT TO CO-OPERATIVE DAIRYING INDIAN DAIRY
CORPORATION
The Indian dairy corporation (I.D.C) was setup under company’s act, on
immediate need to setup IDC was to handle the popularly known as “Operation Flood”.
Thus it became mainly a financing cum promotional of the central Government.
THE MAIN OBJECTIVES OF INDIAN DAIRY CORPORATION:
 To promote dairy industry on the countries.
 To assist the state Government and other organization including co-
operative societies interested in the promote of dairy industry to meet the
requirement of milk and milk products.
 To provide a package of technical inputs for enhancement of milk
production. Resettlement of city based cattle in the rural areas.
 To assist in expanding the capacity and operations of existing dairies in
the cities and rural.
NATIONAL DAIRY DEVELOPMENT BOARD (NDDB):-
At the time of inauguration of cattle feed factory at Kanjari in October, 1964, the
late Lal Bahadur Shastri, and the prime minister of India made an unscheduled visit to
milk production co-operative society and stayed there overnight. He was impressed by
the socioeconomic changes brought by milk co-operative in Kaira District, and desired to
have a national dairy development board is the chief executive of the organization who is
supported by professionals to carry out board’s activities

36
ANAND PATTERN DAIRY DEVELOPMENET
The formation of Anand pattern of milk co-operative was landed with the
organization of the kaira District co-operative milk produces limited at processing and
marketing are controlled by milk producers themselves. Anand. In this pattern, the
functions of dairying milk production procurement.
KAIRA DISTRICT CO-OPERATIVE MILK PRODUCERS UNION
LIMITED (A.M.U.I):
Amul symbolizes the successful struggle of kaira district farmers to earn a fair
price for their products. It reached its climax in 1945. The milk was then by a private
trade Mr. Pestonji Edurji person through contractors for Bombay milk scheme. At a
general meeting of members, representatives are selected to form a managing committee,
which manager the day to milk collection and its testing concepts, sold cattle feed.
FUTURE FOCUS:-
India is the largest producer of milk in the world. Milk and milk products
accounting for a significant 17 percent of India’s total expenditure on food. India’s total
milk production is projected to grow to 108million tones by end 2007 important position
in the global at US $ 133 million is estimated to be growing at 8-10 percent per annum.
The cheese market is estimated to be US $ 110 million in value terms and an
estimated 54000 tones in volume terms, and has been growing at a compound annual
growth rate (C.A.G.R) of 8-9 percent during 1999 -2003. The growth in urban in areas
has been higher at about 15 percent per annum. The ice cream market in India is
estimated to be about US $ 199 million per annum.
A few corporate employers, including MNCs, are now focusing on this market.
For example, Nestle and Britannia have forayed into emerging segments such as Ultra
Heated Treatment (U.H.T) and flavored milk. Ultra Heat Treated (U.H.T) milk is
becoming popular and the market is estimated at US $ 33.4 million (Rs. 1.5 billion).
The growth and future potential in the dairy sector have resulted in significant
investment into this sector in the last decade. Total investment in the dairy sector during
1991-2002 was around US $ 3.3 million. Current consumer trends like increasing
urbanization indicate that this segment will continue to be attractive in the future.

37
DAIRY INDUSTRIES IN ANDHRA PRADESH:-
In Andhra Pradesh, agriculture is the major activity and the dairy industry has a
natural link with it as it is a complementary activity. The progressive farmers of Andhra
Pradesh are known for their scientific and technological applications in the forms. In the
initial stages, the dairy development was looked after by ministry of Animal Husbandry,
but the responsibility was soon shifted to a Directorate. At that time of the industry was
mostly in the hands of private individuals and the quality and price of milk was highly
variable.
A pilot projects at Hyderabad and Vijayawada came into existence with the gift of
milk processing units from UNICEF. These projects gave a new turn to the industry and
soon chilling centers were established in Krishna District. Later, co-operative dairies
were started in Nellore, Chittoor, Warangal and Kurnool.
Dairy development become a part of ministry of agriculture and food at the state
level activates of the central dairy, its other dairy units and the co-operative dairies came
into scrutiny in 1971.
A.P.DAIRY DEVELOPMENT CO – OPERATIVE LIMITED:-
The Genesis:
A state –wide enterprise of co-operative for dairy development co-operative
federation (A.P.D.D.C.F), as an enterprise of one million farmers for dairy development,
had its genesis in 1981, with a three –tier co-operative structure.

38
DAIRY CO – OPERATIVE STRUCTURE:-
Apex Body
State level
District Level
Ten Unions
Village level Milk
Producers
9228 societies
Co-operative societies
fig. no:- 2.1
OBJECTIVES:
 To organize co – operative of milk producers at village and district level.
 Provide essential inputs to enhance milk production feed and fodder production.
Grass breeding programs. Veterinary aid, and take up development programs to
provide effective leadership and management skill to the milk producers to help
them manage their own 9200 co-operatives.
 Development infrastructure for processing of milk and manufacture of dairy
products and market wholesome and quality milk and milk products.
 Fulfill the consumer needs of liquid mild products in the products in the state.
 Develop new products and packaging lines in time with the changing scenario of
consumer market and needs.
 Integrate dairy development with overall rural development effort and provide
greater employment to the rural poor.
 Today, there are 7000 co-operative with 300 all women co-operative and a
membership of over 8 lacks people across the state.
APDDE AT A GLANCE
--
A.P.D.D.C.F
Milk Unions

39
District milk unions 10 No.
Milk sheds 5 No.
Milk products factories 7 No.
District dairies 9 No.
Major dairies 2 No.
Milk chilling centers 63 No.
Chilling capacity 11.37 LLPD
Processing capacity 50.06 LLPD
Milk products factories 17.50 LLPD
District dairies 3.24 LLPD
Major dairies 3.50 LLPD
Total processing capacity 24.24 LLPD
Milk collection routes 421 No.
Milk procedures co-operative
Societies
4270 No.
Milk procedures associations 4958 No.
Milk collection centers 9228 No.
Turnover 1999-00 637.43Crores
Table:- 2.3 Apdde at a Glance
PROFILE OF VIJAYA DAIRY

40
The Krishna District Milk Producers Mutually Aided Cooperative Union Ltd
(Reg. No.2001/355) is popularly known as Milk Project / Vijay a Dairy. It is also called
as Krishna Milk Union. This is a District Comparative engaged in procurement of Milk,
processing, liquid milk sales manufacturing of milk products and marketing.
Milk is a highly perishable commodity requiring utmost care for its handling and
timely disposal. The Krishna Milk Union has a large scale of operations as a rural dairy
industry having a status of public utility service. It has an annual business turnover of
Rs.180 Cores as of 2006-2007.
In view of the industrial status and essential service of Krishna Milk Union in the
District, a study on its Funds flow analysis management is interestingly undertaken with
facts and figures.
The Krishna District in Andhra Pradesh is endowed with rich agricultural and
livestock wealth are two main planks to keep the district ahead of others in the state.
Agriculture and dairying is a subsidiary occupation for the majority of people in the
district. Most of them are marginal, landless, poor farmers and labourers.
The Krishna District has great potential for milk production with a substantial
marketable surplus to tap. The market oriented milk production is the key livestock
activity to generate is mainly dairy oriented. It is livelihood security to the rural poor and
buffers the risks due to crop failure.
CATTLE POPULATION IN KRISHNA (2011-12):-
BREEDABLE ANIMALS POPULATION (Rs In Lakes)
Buffaloes 4.14
Cows 0.38
Total 4.52
Table:- 3.1 Cattle population in Krishna
The organized dairying in Krishna District commenced in 1965 by the state
Government with the assistance of UNICEF. (United Nations International Children
Emergency Fund).

41
Under a pilot project named INTERGRATED MILK PROJECT
HYDERABAD AND VIJAYAWADA (1960). A milk supply scheme was introduced in
1965 to organize milk collection from the village, to process at chilling centre and supply
pasteurized milk to the consumers at Vijayawada and Hyderabad.
The Milk Supply Scheme was a success with its services to the producers and
quality supplies to the consumers. The initial procurement network was gradually
extended to all over the district within a span of 5 years. The “Milk Product Factory” first
of its kind South Indian was established and commissioned in Vijayawada by 1969.
Starting with a tiny procurement of 243 litters of milk on 11-2-1965 under the
Milk Chilling Centre, pamarru, the collection in the District has surpassed one lake
installed capacity of Milk Products Factory, Vijayawada within two years i.e. in 1971
necessitating additional capacities.
The Units were Under Dairy Development Department (1971). The products
manufactured Milk Products Factory, Vijayawada such as Butter, Ghee, Skim Milk
Powder, Whole Milk Powder and Infant Milk Food with the brand name VIJAYA earned
appreciation of consumers all over the country.
The VIJAYA became synonym for superior quality competing AMUL. The Milk
Project is a buzz word among the public all over the region. The expansion of milk
products factory, to meet the increased handing needs has been taken up later under
OPERATION FOOD Programmed by National Dairy Development Board (NDDB).
EXISTING INFRASTRUCTURAL FACILITIE IN KRISHANA UNION:

42
S .NO NAME OF THE FACILITY UNIT CAPACITY
I.
MILK CHILLING
1 Pamarru Litters / Day 50000
2 Verrankilock Litters / Day 18000
3 Gudlavalleru Litters / Day 18000
4 Hanuman Junction Litters / Day 18000
5 Chillakallu Litters / Day 12000
6 Tiruvuru Litters / Day 12000
TOTAL CHILLING 128000

43
II.
MILK PROCESSING Lakes Litters /
Day
2.50
III.
GHEE MANUFACTURE MITs /Day 18.00
IV.
MILK DRYING MITs /Day 22.00
V.
U.H.T. MILK MITs /Day 45000
VI.
CATTLE FEED MIXNG FACILITY
1 Bubhavaram MITs /Day 30.00
2 Gudlavalleru MITs /Day 18.00
TOTAL 48.00

44
Procurement net work: (2008-09)
Milk coop societies 676
Milk producers associations 320
Procurement routes 35
Women coop societies 103
Table:- 3.2 Krishana Union Infrastructure facilities
ORGANIZATION:
Integrated Milk Project (1960).
Dairy Development Department (1971).
A P Dairy Development Corporation Ltd (1974).
A P Dairy Development Co. Op Federation Ltd (1981).
There was a big retinue of 1850 staff in different categories working under the
Dairy Units in the District under the administrative control of AP Dairy Development
Corporation (APDDC) a State Government Under taken in 1974.
The replication PF Anand Pattern Dairy Cooperation in Krishna District has its
beginning with the all out support of NDDB. Primary Milk Produces cooperative society
at village level and District Milk Producer’s cooperative union at District level and AP
Dairy Development Cooperative Federation at State level have come in to begin.

45
ANAND PATTER
FEDERATION
(STATE LEVEL)
UNION
(DISTRICT LEVEL)
SOCIETY
(VILLAGE LEVEL)
Fig. No:- 3.1
The structured and institutional reforms that are part and parcel of NDDB took
few years to unfold Krishna Milk Union in Federation an Apex Body under APCS, 1964,
(Andhra Pradesh Cooperative Societies Act, 1964).
The management of dairy units in Krishna District transferred to the respective
democratically elected Board of Management with assets and liabilities and staff as is
where is with effect from 08-02-1985. The producer is the owner of the business.

46
AND LIABILITIES AS AN 8-02-1985:
S.NO LIABILITIES Amount
(Rs. In lakes)
ASSETS Amount
(Rs. In
lakes)
1 Loans Transferred
from APDDCF
231.21 Assets Hyd. From
APDDCF
173.96
2 Net Value of Assets
Transferred
184.12 Assets Hyd. From
APDDCF 241.37
TOTAL 415.33 TOTAL 415.33
Table:- 3.3 Assets and Liabilities As an 8-02-1985
The Unions has to function as per the bye-laws. The APDDCF is the Apex
Body, Marketing within the district is of the union and outside the state it is controlled by
Federation. The operation area of the union is restricted to Krishna District only.
The Union with inherent problems had undergone travails in 80s and 90s for
survival. The performance of Federation towards its constituent union was deplorable.
The Federation has been impeded by various institutional and management weakness.
Unfortunately, it has adopted the view of “Let us get through the crisis together”.
Krishna Union was running with abnormal staff cost of 22 per cent over its
turnover which is unbearable and against the industrial norms threatening the very
existence of the union.
The Union ventured to prune the surplus manpower by implementing VRS
(Voluntary Retirement Scheme) in a phased manner with an outlay of Rs.10 Cores. The
State Government and NDDB funded one third of the total investment.

47
STAFF COST:
Year 1985 1992 2001 2007
No. Of Employees 1850 1800 1100 570
Salary Cost Per Annum
(In Lakes)
289 670 1629 2400
Table :- 3.4 Staff Cost
Krishna union adopted several measures to discharge its liabilities and to have
a turnaround so as to herald a new path to get better and assured return to the member
produce to these produce MILK building well Government producer centric institutions
with its Mission and Vision.
TABLE ON VRS:
Phase No. Of Employees Retired
1st to 5th 650
2006-07 on words 70
TOTAL 720
Table:- 3.5 Table on VRS

48
MISSION & VISION:
Mission:
“Farmer’s prosperity through technical innovations and customer orientation
with specific focus on quality and cost”
Vision:
Dairying in the district to be the major instrument of strengthening rural
economy and marking available safe milk and milk product.
Quality Policy:
Aiming to be a technologically advanced dairy with global outlook providing
products and services of highest quality delighting the customer.
THE KRISHNA UNION HAS SUCCESSFULLY:
 Evolved long term policies to encourage and augment milk production
and productivity in the District.
 Improved efficiency in reducing the cost of operation, at every stage
from rural farmer to urban customer.
 Increased the availability of milk and milk producers every nook and
corner of District.
 Development and restructured manpower of organization to achieve
competitive edge.
 Consolidated the cooperative structure among the dairy farmer.
DAIRY COOPERATIVES ORGANIZED:
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
630 634 636 636 676 682
Table:- 3.6 Dairy Cooperatives Organized

49
FARMER MEMBERS:
Year No. Of Farmers
2007-08 11870
2008-09 119000
2009-10 125000
2010-11 128286
2011-12 131272
2012-13 137143
Table:- 3.7 Farmer Members
PROCUREMENT PRICE INCREASE:
Year MILK PRICE KG. FAT Rs.
2007-08 175.00
2008-09 185.00
2009-10 195.00
2010-11 200.00
2011-12 215.00
2012-13 255.00

50
Most of the Village Dairy Cooperative Societies are viable and managed by
the producer receiving better technical know-how. The Government has enacted
APMACS Act, 1995. (Andhra Pradesh Mutually Aided Cooperative Societies Act, 1995),
which provides autonomy to the cooperatives. As per the policy and directives from the
state Government / federation, the Dairy Cooperative registered under APCS Act, 1964
were converted into APMACS Act, 1995. The Krishna Milk Union also with the wishes
of its member producers.
Elections are being held as per byelaws to board of management of Krishna
Union APMACS Act, 1995.

51
General Body
Board of Union
Managing Committee Of Village
Society
Member Producer in the Society
Fig. No:- 3.2
The Board of Management is translating its concepts in to realities as we study further.

52
The union was under tremendous pressure at a stag to reformulate independently
under the APMACS Act, 1995 since 2001. Both the state Federation and Government
have adopted different stance towards the unions under the APMACS Act, as the
Federation can no longer exercise control over the Unions as they enjoy autonomy in
their affairs.
The cooperation and coordination to the union from the APDDCF is lacking
Relation between Union and Federation strained. Several hurdles were created in
marketing activities of the union in order to affect its fiscal status to organize the
business.
The State Government has finally promulgated an Ordinance in Feb 2006 de-
linking the Dairy Cooperative only from the APMACS Act, 1995 and bringing them back
into the APCS Act, 1964 under which they can have full administrative control.
The Union approached the high court in the matter and their appeal was allowed
and dismissed the ordinance issued as unconstitutional. Since them the Government and
the Federation were adopted a vindictive attitude towards the union in all its spheres. The
Krishna Milk Union is taking tentative steps address the potent yet potential question of
autonomy under the APMACS Act.
The framers of Krishna District have so much faith and trust in Krishna and
giving their produce in maximum in spite of private players. The Union has sustained of
70 per cent in procurement and 60 per cent in liquid milk marketing.
The Krishna Union is distinctly place in the dairy map of Andhra Pradesh by its
continuous growth. The Union is trying to maintain a long time position with regard to
short term difficulties faced in organization the union and the industry in the district.
It is poised to avail of the producer’s confidence, the resources and the network to
pursue its mission of serving the production there by socio-economic growth dairy and
industry in general. The Krishna Union is translating its concepts into reality as go in
detail.

53
THE KRISHNA UNION HAS THE SALIENT FEATURE:
 Turnover of Business reached to Rs.164 Cores in 2006-07.
 Daily Average milk procurement 185000 lets.
 Highest milk procurement 3100000 lets.
 Daily Average milk sales 164000 lets.
 Obtained ISO: 9001:2000 and HACCA.
Milk is inherently one of the best “Good for you “foods in today’s market
place. Changing consumer food habits, preferences increasing health
consciousness and also the upsurge in the economy are leading to dramatic
changes primarily on need of the consumer’s purchasing power and product
quality.
Vijaya the renowned brand of Krishna Milk Union has strong equity
among consumers. It has been able to make an impact despite the premium
pricing. The brand offer, good margin to the traders. Union has a direct liquid
milk market of 80 per cent out of its procurement. It is converting surplus milk in
to diverse products. Fig no. 3.5

54
PRODUCT MIX OF UNION
Market Milk
Vijaya Gold* Vijaya Special*Vijaya
Premium
*
Vijaya Economy* Vijaya Low Fat
Long Life Products
UHT MILK in 1st it pack* UHT Milk in
2000ml pack*
UHT Low Fat Milk
Fresh Milk Products
Basundi*Curd*Lassi*Butter Milk*
Sterilized Flavoured Milk
Fresh Milk Products
Cooking Butter*Milk Cake*
Skim Milk Powder*
Paneer*Doodh Peda*Ghee.

55
With its wise-polices maintaining equilibrium between supply and demand
throughout the year without imposing restrictions in the supplies of milk and milk
products.
Milk production has risen but productivity is low. Effort is on for quality
in milk production upstream of the processing plant. Union is involved in
producing good products establishing quality by upstream integration with good
hygiene practice given by cooperatives. For downstream side, the check at plant
and market level too exists. Quality is equally valued by one and all in the set up.
The employee’s quality consciousness and commitment makes the
products superior in spite of stiff competition from various other brands in the
domestic market. After initial focus on the home markets, and attaining
considerable and is now targeting on the oversees market.
0
20
40
60
80
100
120
140
160
180
2006-07 2008-09 03-Feb 05-Apr 07-Jun
Series3
Series2
Series1
fig no:- 3.6
The Union is publishing a monthly News Magazine titled: Krishna Ksheeravani a
media on various aspects of dairying to the member producers.
The dairy livestock development is very much linked with veterinary. The stable /
sustained income being provided by Krishna Union to the Dairy Farmers is creating an

56
enthusiasm among the farmers it rear quality breed for higher yield. Comparing to the
cattle population the scale of our veterinary services to the farmer is not up to the mark
for various reasons.
The increasing shortage of qualified veterinary and paramedical staff, inadequate
veterinary dispensaries restricted budgetary allocations for Animal Husbandry and
paucity of funds for Vet-Medicare are a few constraints that need to be addressed with by
state Government.
The Krishna Union realizing the important to input services to the farmers for
sustained milk production is deploying veterinarians at each Milk Chilling Centre for
animal health care service in the clustered villages.
Imparting training to the staff of Dairy Cooperative in veterinary First Aid
Artificial Insemination.
Supplying balance feed for animals.
Providing fodder seed and slips.
Organizing Mass veterinary camps.
Subsidizing Cattle insurance premium.
Inducting Murrah breeding bull to upgrade the local breed.
WOMEN EMPOWERMENT:
Women are exclusively manning 104 Dairy Cooperatives which provides them
empowerment.

57
ORGANISATION:-
As shown fig, 3.7
Milk Products Factory Functional Chart Raw Milk Reception Dock:
 Receives Raw Milk / Chilled Milk from sources.
 Tests initial keeping quality, accepts for further process and weight milk
received.
 Collection samples for fat & SNF analysis by QCL for determination of
value payable.
 Pumps to processing section for further treatment of milk.
Managing Director
produc
tion sales produt plant Financ
e
person
nel
Maint
enance

58
PROCESSING:
As shown fig 3.8
BUTTER:
 Obtains cream and ripens for Butter Making.
 Produces white Butter, packs in 20 Kg blocks and stores.
GHEE:
 Coverts butter and cream into ghee maintaining,’AG’ Mark standards.
 Packs in Bulk pack (15Kg) and small consumer packs for market.
POWDER:
Draws milk from processing section and spay dry into SMP, WMP.
Stores milk for other operations / utilities
Reconstitution and Recimbining of milk
Standardization /Toning of milk as per differentstandards formarketing
Homogenization
Cream separation
Pasteurization

59
Packs in 25Kg poly lines for further disposal.
ASEPTIC PACKING STATION:
 Treats milk at Ultra High Temp and packs aseptically for long shelf life
without refrigeration.
 Undertakes custom packaging of beverages.
PRA PACK:
 Packing of different quality / type of milk in sachets and in cans for
market.
 Storage of secreted milk for distribution.
BI- PRODUCTS:
Manufactures various traditional products to meet market demand.
CIP (Cleaning in – place).
Cleaning all dairy equipment after each day’s operation to ensure hygiene
and sanitation for further operation.
FG Section (Finished Goods).
Stock all finished product for subsequent release as per requirements /
indents.
STORES (General and Mechanical):
Keeps inventory, supplies packing material for different products, chemicals,
equipment, spares required in the dairy operations regularly.
ENGINEERING DEPARTMENT:
 BOILER: Generates steam required for dairy operations.
 ELECTRICAL: Monitors power supplies for all operational needs.
 REFRIGERATION: Refrigeration requirements of the Dairy.
 MANITENANCE: Look- after both the trouble shooting and preventive
maintenance of dairy plant for smooth and uninterrupted operations.

60
QUALITY CONTROL LABORATORY (QCL):-
 Overseas ensuring rigorous quality control checks as per relative Laws /
Acts at several of production and operations.
 Product gets out after the clearance by QCL.
 Stringent check adopted on purchase and supply of stores material for the
organization.
CIVIL:
o Executes all civil of works for up-keeping of units.
TRANSPORT:
 Provides limited transport facilities.
SECURITY:
Shoulders responsibility of security and vigilance in the dairy and units to
prevent untoward incidents of any nature.

61
THEORETICAL FRAME WORK OF CAPITAL
BUDGETING
An efficient allocation of capital is the most important finance function in the
modern times. It involves decisions to commit the firm’s funds to the long-term assets.
Capital budgeting for investment decisions is of considerable importance to the firm since
they tend to determine its value by influencing its growth, evaluation of capital budgeting
decisions.
NATURE OF INVESTMENT DECISIONS:
The investment decisions of a firm are generally known as the capital budgeting,
or capital expenditure decisions. A capital budgeting decision may be defined as the
firm’s decision to invest its current funds most benefits over a series of years. The long-
term assets are those that affect the firm’s operational beyond the one year period.
Investment decisions generally include expansion, acquisition modernization and
replacement of the long-term assets. Sale of a division or business (Divestment) is also an
investment decision. Decision like the change in the methods of sales distribution, or an
advertisement campaign or a research and development program have long-term
implications for the firm’s expenditure and benefit, and therefore , they should also be
evaluated as investment decisions.
For example:
Management may be considering proposal to build a recreation room for
employees. The decision in this case will be based on qualitative factors, such as
management employee relation, with less consideration on direct financial returns.
However most investment proposal considered by management will require quantitative
estimates of the benefits to derive from accepting the project. Bad decision can be
determine to the organization over a long period.

62
FEATURES OF CAPITAL BUDGETING:
The important features, which distinguish capital budgeting decision in
other day-today decision, are capital budgeting decision involves the
exchange of current funds for the benefit to be achieved in future.
The futures benefits are expected and are to be realized over a series of years.
The fund is invested in non-flexible long-term funds. They have a long term
and significant effect on the profitability of the concern. They involve huge
funds.
They are irreversible decisions. They are strategic decision associated with
high degree of risk.
OBJECTIVES OF CAPITAL BUDGETING
 Understand the nature and importance of investment decisions.
 Explain the methods of calculating net present value(NPV) and internal
rate of return (IRR).
 Describe the Non-DCF evaluation criteria. Payback Period and Accounting
Rate of Return (ARR).
 Institute the competition of the discounted payback.
 Compare and contract NPV and IRR and emphasize the superiority of NPV
rule.
NEED OF CAPITAL BUDGETING
The importance of capital budgeting can be well understood from the fact that
unsound investment decision may prove to be fatal to the very existence of the concern.
The need, significance or importance of capital budgeting arises mainly due to the
following.
Large investments
Long-term commitment of funds
Irreversible nature
Long-term effect on profitability
Difficulties of investment decisions.
National importance.

63
PROCESS OF CAPITAL BUDGETING:
Capital Budgeting is a complex process which may be divided into the following
phases.
Identication of investment proposal.
Screening the propsal.
Evaluation of various proposals.
Fixing priorities.
Final approval & preparation of capital expenditure budget.
Implementing proposal.
Performance review.

64
 IDENTIFICATION OF INVESTMENT:
The capital budgeting process begins with the identification of investment
proposal.
The proposal or idea potential investment opportunities may originate from the top of
management or from any officers of the organization. Capital expenditures planning
committee in the case of large organization or the officers concerned with the process of
long-term investment decision.
 SCREENING THE PROPOSAL:
The expenditures planning committee screens the various proposals received from
different departments. The committee view these proposals from various angles to ensure
that these are in accordance with the corporate strategies or selection criterion of the firm
and also do not lead to the department imbalances.
 EVALUATION OF VARIOUS PROPOSALS:
The next step in the capital budgeting process is to evaluate the profitability of
various proposals. Net present value method, internal rate of return, etc.
It should be classified as below.
Independent proposals.
Contingent or dependent proposals and
Mutually exclusive proposals.
 FIXING PRIORITIES:
After evaluating various proposals, the unprofitable proposals may be rejected
straight away. But it may not be possible for the firm to invest immediately in the all the
acceptable proposals due to limitation of funds.
 FINAL APPROVAL & PREPARATION OF CAPITAL
EXPENDITURE BUDGET:
Proposals meeting the evaluation and other criteria are finally approved to be
included in the capital expenditure budget. The capital expenditures a budget lays down

65
the amount of the estimation expenditures to be incurred on fixed assets during the
budget period.
 IMPLEMENTING PROPOSALS:
Translating an investment proposal into a concrete project is a complex, time
consuming, and risk- fraught task.
Adequate formulation of projects:
The major reason for delay is insinuate formulation of project put differently, if
necessary homework in terms of preliminary comprehensive and detailed formulation of
the project
Use of the principle of responsibility accounting:
Assigning specific responsibility to project managers for completing the project
within the defined time-frame and cost limits is helpful for expeditious execution and
cost control.
Use of Network Techniques:
For project planning and control several network techniques like PERT
(Programme Evaluation Review Techniques) and CPM (Critical Path Method) are
available.
 PERFORMANCE REVIEW:
Performance review, or post – completion audit, is a feedback device. It is a
means for comparing actual performance with projected performance.
It is useful several ways, are.
It throws light on how realistic were the assumptions underlying the
progect.
It provided a documented log of experience that is highly valuable for
decision making.

66
IMPORTANCE OF INVESTMENT DECISIONS:
Investment decisions require special attention because of the following reasons.
They influence the firm’s growth in the long term.
They affect the risk of the firm.
They involve commitment of large amount of funds.
They are irreversible, or reversible at substantial loss.
They are among the most difficult decisions to make.
TYPES OF INVESTMENT DECISIONS:
There are many ways to classify investment one classification is as follows;
 Expansion of existing business.
 Expansion of new business.
 Replacement and modernization.
Expansion and Diversifications:
A company may add capacity to its existing product lines to expand
existing operations. For example of related diversification.
A firm expand is activities in a new business expansion of a new business requires
investment in new kind of production activating within the firm. If packing
manufacturing company invests in a new plant and machinery to produces ball bearings,
which the firm has not manufactured before, this represents expansion of new business or
inrelated diversification. Sometimes a company acquires existing firms to expand its
business.
Replacement and modernization:
The main objective of modernization and replacement is to improve operating
efficiency reduce costs. Assets become outdated and absolute with new assets that
operate more economically. Replacement decisions help to introduce more efficient and
economical assets and therefore, are also called cost-reduction investments.

67
How ever replacement decisions that involve substantial modernization and
technological improvements expand revenues as well as reduce costs.
Yet another useful way to classify investment is as follows;
 Mutually exclusive investments.
 Independent investment.
 Contingent investment.
 Mutually exclusive investments:
Mutually exclusive investment serves the same purpose and compete with
each other. If one investment understands others will have to be excluded.
Accompany May, for example, either use a more labour intensive, semi-automatic
machine, or employ a more capital intensive, highly automatic machine for
production.
 Independent investments:
Independent investment serve different purposes and do not compete with
each other. For example, a heavy engineering company may have been
considering expansion of its plant capacity to manufacture additional excavators
and addition of new production facilities to manufacture a new product.
 Contingent investment:
Contingent investment are dependent projects, the choice of one
investment necessitates understanding one or more other investment for example,
if a company decides to build a factory in a remote, backward area, it may have to
invest in houses, roads, hospitals, schools, etc., and the total expenditure will be
treated as one single investment.

68
INVESTMENT EVALUATION CRITERIA:
Three steps are involved in the evaluation of investment.
Estimation of cash flows
Estimation of the required rate of return.
(The opportunity cost of capital)
Application of a decision rule for making the choice.
PROJECT CASH FLOWS
Project cash flows are defined as the financial costs and benefits associated with a
project the estimation of costs and benefits are made with the help of inputs provided by
marketing, production, engineering, costing, purchase, taxation, and other departments.
The project cash out flows where as the benefits are denoted as cash inflows. The future
cost and benefits associated with each project are as follows.
Capital costs
Operating costs
Revenue
Depreciation
Residual value
An investment decision implies the choice of an appraisal technique and the
projects life. The objective and techinique must be related to define period. The
life of the project may be determined by taking into consideration the following
factors.
Technological obsolescence
Physical deterioration
A decline in demand for the out put of the project.
No matter how good a company maintenance policy, its technological forecasting
ability, uncertainty will always be present because of the difficultly in predicting the
duration of a project.

69
To allow realistic appraisal, the value of cash payment or receipt must be related
to the time when the transfer takes place. In particular, it must be recognized that Rs.1
received at some future data because Rs. 1 received today could be concept of “time
value of money” the process of converting future sums in to their present equipment is
known as discounting. Which is to determine the present value of future cash flows?
BASIC PRINCIPLES FOR MEASURING PROJECT CASH FLOWS
For the developing, the project cash flow principles must be kept in mind:
1).INCREMENTAL PRINCIPLE
The cash flows of a project must be measured in incremental terms. To ascertain a
projects incremental cash flows, one has to look at what happened to the cash flow of
the firm “with the project and with out project”and not before the project and after the
project as is some times done. The difference between the two reflected incremental
cash flows attributable to the project.
Project cash flows for year t=
Cash flow for the firm with the project for year t-Cash flow for the firm with out the
project for year t.
2).LONG TERM FUNDS PRINCIPLES
A project may be evaluated form various ppoint of view totl funds point of
view,long term; funds point of view,and euity point of view the measurement of cash
flows as well as the determination of the discount rate for evaluating the cash flows
depends on the point of view of long term funds (which are provide by equity stock
holders,preference stock holders,debent;ures holders.In addition,term lending institutions)
because the principle focuses of such evaluation is normally on the profitability of long-
term funds.
3) EXCLUSION OF FINANCING COSTS PRINCIPLE:
When cash flows relating to long-term funds are being defined, financing costs of
long-term funds should be excluded from the analysis. The question arises why? The
weighted average cost of capital used for evaluating the cash flows takes in to account the
cost of long-term funds. Put differently, the weighted average cost of capital. Hence, if

70
interest on long- term debt and dividend on eqity capital are deducted in defining the cash
flows, the cost of long- term funds will be counted twice.
The exclusion of financing costs principle means that.
 Interest on long-term debts is ignored while computing profits and taxes
and.
 The expected dividends are deemed irrelevant in cash flow analysis.
While dividends pose no. Difficulty as they come only from profit after taxes, interest
needs to be handled properly since interest is usually deducted in the process of arriving
at profit after tax, an amount equal to interest
(1-tax rate) should be added back to the figure of profit after tax that is
Profit before interest and tax (1-tax rate)
= (profit before interest tax + interest) (1-tax rate)
= profit after tax + interest (1 – tax rate)
4). POST – TAX PRINCIPLE
Tax payment like the one other payment must be properly deducted in deriving
the cash flows that is cash flows must be defined in post – tax terms.

71
EVALUATION OF CRITERIA:
A number of investment criteria (or capital budgeting techniques) are in use in
practice. They may be grouped in the following two categories.
CAPITAL BUDGETING TECHNIQUES:-
As shown fig, 4.2
CRITERIAN TABLE:
In the evaluation, process or capital budgeting techniques there will be a criteria
to accept or reject the project. The criteria will be expressed as:
CRITERIA / METHOD Accept Reject
Payback period (PBP) < target period >target period
Accounting rate of return (ARR) >target rate < target rate
Net present value (NPV) .>0 <0
Internal rate of return (IRR) >cost of capital < cost of capital
Profitability index (PI) >1 <1
Table:- 4.1 Criteria table
Capital Budgeting
Techniques
Non-DCFCriteria
Pay Back
Period
A.R.R
DCFCriteria
NPV I.R.R P.I.

72
Non – DCF Criteria:
Payback Period (PB):
The payback period (PB) is one of the most popular and widely recognized
traditional methods of evaluation investment proposals. Payback is the number of year
required to recover the original cash outlay invested in a project.
Payback Period calculated may be two ways in long-term investment procedure.
When cash flow after taxes uniform.
When cash flow after taxes not- uniform.
1. When cash flow after taxes uniform:
When cash flow after taxes for a total life period of project is uniform, you can
use the following formula, to ascertain the payback period.
Original Investment (Co)
Payback Period = -----------------------------------------
Annual cash flow after taxes (C)
Where:
Co: Original Investment
C: Annual Cash flow after taxes
When cash flow after taxes not – Uniform:
When cash flows after taxes of the project total life period is not uniform.
You can use the following formula,
Accepted & Rejected of Payback Period:
Calculate Payback Period is less than standard payback period the project
is accepted.
Calculate Payback Period is grater than standard payback period project is
rejected.
Calculate equal to standard payback period the project will be conceder.

73
Advantages:
It is simple very is easy to understand.
Cost involvement in calculating payback period is very less.
As compare to sophisticated method.
Limitations:
 It ignores cash after taxes, after calculation payback period.
 It does not concedred the time value of money.
 It is not consistence with objective of maximising share holder wealth.
 It not appropriate method of measuring profitable investment proposal.
Accounting Rate of Returns:-
Accounting Rate of Returns uses accounting information as reviled by financial
statement measures. The profitability of the investment proposal is also known as return
on investment also non rate of investing some times is it known as average rate of return.
Average annual earnings after depreciation taxes, are used to be calculated ARR is
measured in terms of percentage.
1. Whenever is clearly mencations that Accounting Rate of Returns:
Average Earning after depreciation & taxes
ARR = ------------------------------------------------------------ * 100
Original Investment
Where: Original Investment = Cost of asset + additional working + transportation
Charges + installation charges
2. Whenever is clearly mencation as Average Rate of Return:-

74
Average Earning after depreciation & taxes
ARR = -------------------------------------------------------- *100
Average ( Half of the ) Investment
Where:
Cost of asset – Scrap value
Average investment = ------------------------------------ + Additional value + Transport
2 charges + Working Capital
+ Scrap value
Accepted & Rejected Role:-
Calculation Accounting Rate of Return is greater than cut of rate should be
accepted.
Calculation ARR is less than the cut of rate should be rejected.
Calculation ARR is equal to the cut of rate should be considered.
Advantages:
Information cans easly drawn from accounting records.
Taken into accounting all profits are life period of the projects.
Limitations:
 It is ignores of time value of money.
 Doesn’t allowed profits to all amount investment.
 Doesn’t fulfill the objective of wealth maximization.
 Doesn’t deference’s the size of the investment requires each project.

75
DISCOUNTING CASH FLOW (DCF) TECHNIQUES:-
Modern & Discounting cash flow techniques taken to consideration almost all
deference’s, are traditional methods almost with consider all benefits and cost occurring
during the project entail life period.
Modern techniques sub-divided into three types, are
 Net Present Value
 Internal Rate of Return
 Profitability Index
Net Present Value Method (NPV):-
The NPV one of the most important that method, evaluation of long-term
investment proposals in discounted cash flow techniques. NPV is also known as
discounted benefit cost ratio method. NPV can be defined as present value benefits.
NPV = Present value of benefits – Present value of cash inflow.
Present value cash inflows find out using cost of capital in an appropriate rate of
discount and subtract present value of cash outflows and subtract present value of cash
outflows from the cash inflows and find the NPV which may be +ve or –ve.
NPV = Cash inflows after taxes multiple with appropriate – Cash Outflow
discount rate and its total
Steps involved in calculation of NPV:-
 Forecasting of cash inflows after investment project based on realistic assumption.
 Calculation cost of capital which is useful as discounting factor by conversion of
feature cash inflows.
 Cash flows in calculation using cost of capital as discounted rate.
 Find out NPV by separating present value of cash outflows present value of cash
inflows.

76
Acceptance & Rejected Role:-
NPV > 0 Project is accepted.
NPV < 0 Project is rejected.
NPV = 0 Project is Considered.
Advantages:-
We tax into accounting the time value of money.
Uses all cash inflows occurring over the entire project.
Is particular useful for the selection of mutually exclusive project.
It is consistence with of shareholders wealth.
Limitations:-
With is default to under stand compared with payback period & ARR.
In case of projects involving different give deflectable.
Internal Rate of Returns (IRR):-
This is another important discount cash flow technique of capital budgeting
discount. IRR can be defined as that rate which equities the present value of cash inflows
with the present value of cash outflows of an investment proposal of investment proposal.
It is the rate at which the NPV of investment proposal is ‘0’. It is computed by the
following formula.
C
IRR = A + ------------- (B-A)
C – D
Where:
C = Positive NPV
D = NPV value Negative
B = Rate of return at high price.
They approach is to selected any rate of interest to compute the present value of
cash inflows. If the calculated present than the present value of cash outflows present
value of cash inflows is higher than, the present value of cash outflows as higher rate.

77
NPV becomes is ‘0’ the IRR to be determined at which NPV is ‘0’.
Acceptance & Rejected Rule:-
IRR > 0 Project should be accepted.
IRR < 0 Project should be rejected.
IRR = 0 Project should be considered.
Advantages:-
It considered the time value of money.
It considered cash flow over entire.
It is also comparable with firm’s object of maximising owner’s welfare.
The IRR subjected the maximum rate of return and gives fairly good idea regarding
the profitability idea.
Limitations:-
 Difficult to calculating and understand.
 It mayn’t give any a concepts all situations.
 If the project refers either expected life are cash outlays and times of cash flows.
Profitable Index Method (P.I.):-
Which is another discounted cash flows method of evaluating investment
proposal? It is also known as discounted cash ratio method these simallry to NPV
method. It is the ratio of present value of cash inflows at the required rate of return the
intial cash outflow of the investment proposal.
NPV method is not relivable method is evaluating project requiring unequal
investment profitability index the ratio which is derived by the present value of cash
inflows by present value of cash outflows.

78
PVCIF
P.I. = ----------------------
PVCOF
Where,
P.I. = Profitable Index
PVCIF = Present Value of Cash flow Index.
PVCOF = Present Value of Cash flow Outflow.
Accepted & Rejected Role:-
PI > 1 Project Should be excepted.
PI < 1 Project Should be rejected.
PI = 1 Project should be concedered.
Advantages:-
It gives the concederation of time value of money.
It considered all cash flows to determine the profitable index.
It helps to rank project according to the PI.
Limitations:-
 It is concestance with objectives of maximation of share holder wealth.
 It is also used to choice meatually exclusive projects by the calculating the
incremental benit cash flows.

79
DATA ANALYSIS AND INTTERPRETATION
PAY BACK PERIOD:
The pay back period is calculated as follows.
Unrecovered Amount of Investment
Payback Period = Year before recovery investment + -------------------------------------------
Cash flow after taxes for next period.
Calculation of pay back period:
Show the fig. 5.1
YEARS INCOME
(PAT) (Rs)
In Lakhs
DEPRECIATION
(Rs in Lakhs)
CASH
INFLOW (Rs)
CUMULATIVE
CASH
INFLOWS (Rs)
in Lakhs
2008-
2009
8,06,058.84
14,40,862.05
22,46,920.89 22,46,920.81
2009-
2010
26,27,247.73
12,02,029.78
38,29,277.51 60,76,198.4
2010-
2011
9,59,515.33
11,07,716.00
20,67,231.33 81,43,429.73
2011-
2012
2,14,76,850.73
12,99,383.03
2,27,76,233.76
3,09,19,663.49
2012-
2013 2,97,85,848.70 18,35,383.13
3,16,21,231.83
6,25,40,895.32
Source: Annual reports of KDMPCU Ltd...

80
Initial out lay = 3, 28, 63,671
19, 44,007.51
Pay back period = 4 +
3, 16, 21,231.83
= 4 + 0.061
= 4.06Months
Fig no:- 5.1
Criteria for evaluation:
The pay back period computed for a project is less than the pay back period set by
management of the company, it would be accepted. A project actual pay back period is
more than the determined period by the management, it will be rejected.
Decision:
The standard payback period is set by the company for considering expansion
project is five years, where as actual pay back period is 4.06 months. Hence we accept
the project.
Conclusion: - Accept the project.
0
1
2
3
4
5
6
standeredpay back actual pay back
2011-2012
2011-2012
2012-2013
2012-13

81
AVERAGE RATE OF RETURN:
ARR is usually taken the earnings expected from the investment throughout the
whole life period.
Average annual profits
ARR = ----------------------------------------- x 100
Average investment
Calculation of ARR:
Show the fig. 5.2
YEARS INCOME
(Rs in lakhs)
DEPRECIATION
(Rs in lakhs)
CASH
INFLOWS
(Rs in lakhs)
2008-09 8,06,058.84 14,40,862.05 -6,34,803
2009-10 26,27,247.73 12,02,029.78 1,45,218
2010-11 9,59,515.33 11,07,716.00 -1,48,201
2011-12 2,14,76,850.73 12,99,383.03 2,01,77,468
2012-13 2,97,85,848.70 18,35,383.13 2,79,50,466
Source:-Annual reports of KDMPCU Ltd...

82
4, 87, 70,148
AVERAGE PROFIT = -----------------------
6
= Rs 97, 54,030
3, 28, 63,671
AVERAGE INVESTMENT = ----------------------
2
= Rs 1, 64, 31,836
97, 54,030
ARR = ----------------------- X 100
1, 64, 31,836
= 0.59361 X 100
= 59.361%
Criteria for evaluation:-
The ARR is greater than cut of rate should be accepted. Calculation ARR is less
than the cut of rate should be rejecting. Calculation ARR is equal to the cut of rate the
project should be accepted. In the above calculation the ARR is 59.361%. If the above
calculation the ARR is 59.361%. If the actual ARR rate is greater than the cut of rate.
Decision:-
The project should be accepted, due to calculate the ARR is greater than cut of
rate.
Conclusion: - Accepted the project.

83
Calculation Return on Investment:-
Show the fig. 5.2 calculation ROI
YEARS INCOME
(Rs in lakhs)
DEPRECIATION
(Rs in lakhs)
CASH
INFLOWS
(Rs in lakhs)
2008-09
8,06,058.84 14,40,862.05 -6,34,803
2009-10
26,27,247.73 12,02,029.78 1,45,218
2010-11
9,59,515.33 11,07,716.00 -1,48,201
2011-12
2,14,76,850.73 12,99,383.03 2,01,77,468
2012-13
2,97,85,848.70 18,35,383.13 2,79,50,466
Source: Annual reports of KDMPCU Ltd...
AVARAGE PROFIT
ROI = ---------------------------------------X 100
INITIAL INVESTMENT
5,6,72,339
ROI = ---------------------------- X100
42, 86, 36,698

84
=0.1205X100
= 12.05%
Criteria for evaluation:-
The ROI is greater than cut of rate should be accepted. Calculation ROI is less
than the cut of rate should be rejecting. Calculation ROI is equal to the cut of rate the
project should be accepted.
Decision:-
In the above calculation the ROI is 12.05%. If the actual ROI rate is greater than
the cut of rate the project should be accepted. Due to calculate the ROI is greater than cut
of rate.
Conclusion: - Accepted the project.

85
NET PRESENT VALUE:
The calculation of NET PRESENT VALUE is as follows, fig 5.4,
YEARS CASH INFLOWS
(Rs in lakhs)
DCF (10%) PRESENT VALUE
(Rs in lakhs)
2008-09 22,46,921 0.909 20,42,451
2009-10 38,29,278 0.826 31,62,984
2010-11 20,67,231 0.751 15,52,490
2011-12 2,27,76,234 0.683 1,55,56,168
2012-13 3,16,21,232 0.564 1,78,34,375
TOTAL 4,01,48,468
Source: Annual reports of KDMPCU Ltd..
NPV = Cash inflows – Cash Outflow
NPV = 4, 01, 48,468 – 3, 28, 63,671
= Rs 72, 84,797

86
Fig no:- 5.2
In case of calculated NPV is positive or zero, the project should be accepted. If the
calculated NPV is negative, the project is rejected. If the calculated NPV is equal to the
zero, the project is accepted.
Decision:
The calculated NPV is 72, 84, and 797.00. This value is greater than the zero.
Conclusion: - Accept the project.
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
1 2 3 4 5 6
DCF(12%)
YEARS

87
INTERNAL RATE OF RETURN:
The INTERNEL RATE OF RETURN IS AS FOLLOWS
C
IRR = A + ------------- (B-A)
C – D
Where:
C = Positive NPV
D = NPV value Negative
B = Rate of return at high price.
Calculation of IRR show the fig, 5.5
Source: Annual reports of KDMPCU Ltd,.
YEARS CASH INFLOWS
(Rs in lakhs)
DCF(10%) PRESENT VALUE
(Rs in lakhs)
2008-09 22,46,921 0.909 20,42,451
2009-10 38,29,278 0.826 31,62,984
2010-11 20,67,231 0.751 15,52,490
2011-12 2,27,76,234 0.683 1,55,56,168
2012-13 3,16,21,232 0.564 1,78,34,375
TOTAL 4,01,48,468

88
Source: Annual reports of KDMPCU Ltd…
The comparative analysis of DCF’s from the above two tables
Fig no:- 5.3
YEARS CASH INFLOWS
(Rs in lakhs)
DCF(14%) PRESENT VALUE
(Rs in lakhs)
2008-09 22,46,921 0.847 19,03,142
2009-10 38,29,278 0.718 27,49,422
2010-11 20,67,231 0.609 12,58,944
2011-12 2,27,76,234 0.516 1,17,52,537
2012-13 3,16,21,232 0.437 1,18,18,478
TOTAL 3,14,82,523

89
4,01,48,468
IRR =10 +--------------------------------------------X(18 - 10)
4,01,48,468 – 3,14,82,523
40148468
= 14+ ---------------------- X (8)
8665945
= 10 + 0.37
= 10.37%
Criteria and evaluation:
In this method the project is accepted when IRR is higher than its cost of capital
or cut out rule. If the project is not accepted when the IRR is less than cost of capital.
Decision:
The project is accepted because of the calculation of IRR is higher than its cost of
capital. The cost of capital fixed by management is 10%, the actual is more than its
standard.
Conclusion:
Accepted the project.

90
PROFITABILITY INDEX:
The profitability index is as follows:
Calculation of profitability index, show the fig, 5.6
YEARS CASH INFLOW
(Rs in lakhs)
2008-09 22,46,921
2009-10 38,29,278
2010-11 20,67,231
2011-12 2,27,76,234
2012-13 3,16,21,232
Source: Annual reports of KDMPCU Ltd.,
PV OF CASH INFLOW
PI = --------------------------------------
INITIAL CASH OUTLAY
6,25,40,896
= ------------------------------
3,28,63,671
= 1.903%

91
A project can be accepted if its PI index is greater than one. If the PI is less than
one we should reject the project. If the P.I is equal to one we should accepted the project.
Decision:
Profitability index proposed expansion project is found our 1.903 this is more
than the PI. The calculate profitable index is greater than the one.
Conclusion:
Hence we accept the project.

92
FINDINGS AND SUGGETIONS
FINDINGS:
 The project completion cost is estimated to be Rs 3, 28, 63,671.
 The payback period of the project in SAT in 4.06 months. The payback
period is less than the target period so the project may be accepted.
 The NPV of the project is positive than the value of the capital.
 The internal rate of return is 10.37% it is greater than the cost of capital
i.e., 10%. So the project accepted.
 The profitability index is also more than 1 time return on investment. So
the project is accepted.
 The estimated cash flows of the project include interest and tax.
 The receivable index in KDMPCU Ltd is highly uneven. In some year it is
highly positive and in some year it is negative. The unevenness is not
good.
 The Average Rate of Return is 59.36% it is greater than the cost of capital,
so the project is accepted.

93
SUGGESTIONS:
 The capital recovery period is very good. The same system may be
adopted.
 When taking 10.37% internal rate of return the net present value show
negative value. In that position of concern of when the project is rejected.
This based on to take the internal rate of return.
 The payback period of the project in SAT in 4.06 months. The payback
period is less than the target period, so the project may be accepted.
 The NPV of the project is positive than the value of the capital. Hence the
project was accepted.
 The profitable Index value is less than 1, then opportunity for another
project.
 The estimated cash flows of the project include interest and taxes are
considered due to accept or reject of investment proposes.
 In KSMPCU Ltd, basing on the capital budgeting techniques like NPV,
IRR and P.I. their results the time value of money is assumed and
predicted in a proper way. This can be said basing on the positive results
occurred. Hence time value of money is satisfactory, so it can be
continued these techniques.
 It is advised to minimize cost of capital of the company.

94
CONCLUSION
Based on the study in The Krishna District Milk Producers Mutually Aided
Cooperative Union .Ltd. there is forecasting project cash flow involves numerous
estimate and many individuals and departments participate in this exercise. The role of
the finance manager is to coordinate the efforts of various departments and obtain
information from them, ensure that the forecasts are based on a set of consistent
economic assumptions, keep to the exercise focused on relevant variables and minimize
the bias is inherent in cash flow forecasting.
In the study, I know that the company is following pay back period. Based on the
data shows that the company can use any criteria to get return on the investment.
The project “A study on Capital Budgeting” in The Krishna District Milk
Producers Mutually Aided Cooperative Union. Ltd, it is suggested to hold the company
in the same situation.

95
BIBLIOGRAPHY
FINANCIAL MANAGEMENT - I.M. Pandey
FINANCIAL MANAGEMENT - Prasanna Chandra
FINANCIAL MANAGEMENT - M.Y.Khan & Jain
FINANCIAL MANAGEMENT - V.K.Bhalla
FINANCIAL MANAGEMENT - Sudhindra bhat
FINANCIAL MANAGEMENT - I.C.A.I
‘PROJECTS’ (Preparation, appraisal, implementation) -- Prasanna Chandra
SOURCE OF FINANCE - Sharma & Guptha
SUCCESSFUL PROJECT - O.P.Kharbanda
PROJECT MANAGEMENT - Harey maylor
PROJECT PLANNING AND MANAGEMENT - M.Shaghil
Journals & Magazines:-
Finance India
Indian journal of commerce
The management accounting.
viklapa
WEBSITES:-
 Www. Vijaya dairy.com;
 Www. Investropedio.com;
 Www. Business insider.com;

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