Financial Appraisal of Diversification Project at Ugar Sugar Works

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

Table of Contents:

Particulars Topic

Chapter I Executive Summary

Chapter II Methodology

Chapter III Introduction of Industries

Chapter IV Company Profile

Chapter V Introduction of the product Fragies

Chapter VI Financial Appraisal

Chapter VII Objectives

Chapter SWOT analysis
VIII

Chapter IX Findings

Chapter X Bibliography

Babasabpatilfreepptmba.com Page 1


Chapter I

EXECUTIVE
SUMMARY



EXECUTIVE SUMMARY

Financial Appraisal of project is one of the most crucial aspect in the
project finance and investment decisions. This analysis is made on an on going
project. It is on the topic “Financial Appraisal on Diversification scheme of
Fragies”. Fragies are sugar cubes in the form of ship.

The analysis is based on the financial statement of the company. The main
financial statement used is Estimated Profit and Loss A/ C.

The financial appraisal of THE UGAR SUGAR WORKS Ltd., is analysed
through 5 years projection/ estimation in respect of Cash flow, Profit and Loss A/C
statement, Cost of project, Cost of Capital, Opportunity Cost, Net Present Value of
project, pay back period and Internal rate of return, sources of finance.

The following were the objectives of the study

1. To know the cost of the Project.
2. Time frame required to complete the Project.
3. Financing Method.
4. Cost of Finance.
5. Human Resource Required.
6. Commercial Business.
a. Preparation of Profit and Loss Account.
b. Preparation of Cash in Flow Statement.
c. Calculation of Net Present Value.
d. Payback Period.
e. Internal Rate of Return.
The methodology that was followed was through Primary and Secondary data



Chapter II

METHODOLOGY



Methodology

The project titled Financial Appraisal of diversification scheme is the
analysis of financial Appraisal of THE UGAR SUGAR WORKS Ltd., Ugar-
Khurd.

For this the reliance was on the primary data and secondary data. The
primary data was collected through personal interview of the staff of Finance
department, HR department, and Project manager. The secondary data was the
estimated P&L A/C prepared by the company for the diversification project.



Chapter III

INTRODUCTION
OF INDUSTRY



Introduction of Industry
India has been known as the original home of sugarcane and sugar. Indians
knew the art of making sugar since the fourth century. However the advent of modern
sugar industry in India dates back to mid 1930's when a few vacuum pan units were
established in the sub-tropical belts of Uttar Pradesh and Bihar.

Until the mid 50s, the sugar industry was almost wholly confined to the states
of Uttar Pradesh and Bihar. After late fifties or early sixties the industry dispersed into
Southern India, Western India and other parts of Northern India.

India is the largest consumer and second largest producer of sugar in the
world. The sufficient and well distributed monsoon rains, rapid population growth and
substantial increases in sugar production capacity have combined to make India the
largest consumer and second largest producer of sugar in the world.

The Indian sugar industry has not only achieved the singular distinction of
being one of the largest producer of white plantation crystal sugar in the world but has
also turned out to be a massive enterprise of gigantic dimensions. With over 450 sugar
factories located throughout the country, the sugar industry is amongst the largest
agro processing industries, with an annual turnover of Rs150bn. It plays a major role
in rural development and its importance for India stretches far beyond the role of a
sweetener supplier.

The sugar factories located in various parts of the country work as nuclei for
development of rural areas by mobilizing rural resources and generating employment,
transport and communication facilities. Over 45mn farmers, their dependants and a
large mass of agricultural labor are involved in sugarcane cultivation, harvesting and
ancillary activities constituting 7.5% of the rural population. The sugar industry
employs over 0.5mn skilled and unskilled workmen, mostly from the rural areas.



Since the beginning of planning era, sugar industry operated under a policy of
partial control in 1950-51 and 1951-52, followed by a continuous period of six years
of decontrol between 1952-53 to 1957-58. This policy was followed under the
pragmatic leadership of the then Minister of Food, Shri Rafi Ahmed Kidwai.
However, with his departure, the perception of decontrol was lost.

After alternating between control and decontrol, the government adopted the
policy of partial decontrol in 1967-68 which has since been the mainstay of
government policy except for two short periods of decontrol in the 1970's. Under this
policy, the government procures 40% of production at controlled prices based on the
Statutory Minimum Price for sugarcane, for supply through the Public Distribution
System and the balance 60% is allowed to be sold by the mills in free market subject
to the monthly release mechanism. The details of past government policies for sugar
industry are provided in annexure 1.

The levy quota for sugar mills has been brought down from the peak levels of
70% in 1968-69 to the present levels of 40% as a gradual process of deregulation of
sugar industry.

The number of operating sugar mills in the country has increased from 29 in
sugar year (SY) 1930-31 to 412 by SY1996-97 (sugar year = October 1 st to September
30th). The addition in number of mills was at its peak during seventies when nearly
100 mills were added between 1970 and 1980 to increase the number of operating
units to 300. The development of industry in the past is as given in table below.

The average capacity of the sugar mills in the industry has considerably
moved up from just 644 ton per day in SY1930-31 to 2656 ton per day. But still the
growth in the Indian sugar industry was driven by horizontal growth (increase in
number of units) compared to the vertical growth witnessed in other countries
(increase in average capacity)



Sugar year (Oct-Sept) Number of operating Average capacity ton crushed per
sugar mills day

1930-31 29 644

1940-41 148 750

1950-51 139 882

1960-61 174 1172

1970-71 215 1394

1980-81 315 1718

1990-91 385 2088

.
India is the largest consumer (18mn tonnes) and the second largest producer of
sugar after Brazil. The country produced 201 lakh tonnes (20.1mn tonnes), the highest
ever, in 2002-03. But there was a drastic drop in production in the following two
years with just 135.46 lakh tonnes in 2003-04 and 130 lakh tonnes in `04-05. For the
current 2005-06 season, the production is expected to be between 180-185 lakh
tonnes. While the production in Maharashtra is expected to double from 22.3 lakh
tonnes in 2004-05 to 46 lakh tonnes in the coming season, Tamil Nadu, Gujarat,
AndhraPradesh, Karnataka and Uttar Pradesh would also witness a significant rise in
production.



The sugar factories located in various parts of the country work as nuclei for
the development of rural areas by mobilizing rural resources and generating
employment, transport and communication facilities. Over 45 million farmers, their
dependants and a large mass of agricultural labour are involved in sugarcane
cultivation, harvesting and ancillary activities. The industry employs over 0.5mn
skilled and unskilled workmen, mostly from the rural areas.
After alternating between control and decontrol, the government adopted the
policy of partial decontrol in 1967-68 which has since been the mainstay of the
government policy except for two short periods of decontrol in the 1970s. Under the
present policy, the government reserves 10% of the production at controlled prices for
supply through the Public Distribution System (PDS) and the balance 90% is allowed
to be sold by the mills in the free market subject to the Monthly Release Mechanism.
The levy quota for sugar mills has been brought down from the peak levels of 70% in
1968-69 to the present level of 10% through a gradual process of deregulation of the
sugar industry. The Indian sugar industry has always been highly regulated by way of
requirements of essence for setting up or the expanding of the sugar factory
restrictions and control on the sale and dispatches of sugar, fixation of satisfactory
minimum cane price payable, fixation of levy sugar price, restriction on import and
export, restriction on stock holdings and so forth. With the government decision to
liberalize the economy since 1991, some of the restrictions were removed
The number of operating sugar mills in the country has increased from 29 in
1930-31 to 453 in 2002-03. The average capacity of the sugar mills has considerably
moved up from just 644 tonnes per day in 1930-31 to 3343 tonnes per day in 2002-03.
The growth in the Indian sugar industry was driven by horizontal growth (increase in
number of units) compared to vertical growth witnessed in other countries
Indian sugar industry can be broadly classified into two sub sectors, the
organised sector, i.e, sugar factories, and the unorganised sector, i.e, manufacturers of
traditional sweeteners like gur and khandsari. The latter is considered to be a rural
industry and enjoys greater freedom than the sugar mills. The production of
traditional sweeteners gur and khandsari is quite substantial. Gur is unrefined sugar
and khandsari is non-centrifuged sugar. These are mostly used in villages and rural
folk as sweeteners and also as important sources of nutrition. Though the trends
indicate a progressive shift from traditional sweeteners to white sugar over the years,



they still account for about 37% of total sweetener consumption in India.
Since the sugar industry in the country uses only sugarcane as an input, sugar
companies have been established in large cane growing states like Uttar Pradesh,
Maharashtra, Tamil Nadu, Karnataka, Punjab and Gujarat. Maharashtra leads in the
number of sugar mills, which are mainly in the cooperative sector, and also in sugar
production, followed by Uttar Pradesh. The farmer’s cooperatives own and operate
the largest of the industry's total capacity. They are concentrated primarily in
Maharashtra and Eastern Uttar Pradesh. The largest number of sugar companies in the
private sector is located in south India, in the states of Tamil Nadu, Karnataka and
Andhra Pradesh. Uttar Pradesh has also some private mills which are operating in a
very large scale. Out of the 453 sugar mills in the country, 269 are in the cooperative
sector, 184 in the private sector and 67 in the public sector. Besides, 136 units in the
private sector are in various stages of implementation. In India sugar production
follows a 5-7 year cycle. Sugar production increases over a 3-4 year period, reaches a
high, which in turn, results in lower sugar prices. As a result of lower sugar price,
realizations of sugar mills, the sugarcane arrears increase. The increase in sugarcane
arrears results in lower sugarcane production, resulting in lower production for the
next 2-3 years. Because of lower sugar production, the prices shoot up resulting in
increased area under sugarcane cultivation during the next season.
Due to heavy domestic consumption (approximately 18mn tones), India is not
in a position to export sugar in large quantities. This year the export could be around
five lakh tonnes. The export would be primarily the obligation that the importers of
raw sugar would have to fulfil. Moreover, the mills would find it more profitable to
sell in the domestic market rather than export it. Currently, export price for white
sugar is $340-350 a tonne f.o.b (Rs 15,375-15,825). In the domestic market, medium
sugar is ruling at Rs 18,740-19,270 a tonne, while small sugar is quoting at Rs18,110-
18,410.



Chapter IV



COMPANY
PROFILE

Company Profile



History and Origin

About sixty years ago Ugar Khurd was a small hamlet in the erstwhile
princely state of Sangli. It was however blessed with two great advantages. On its
south flowed the perennial river Krishna and on the north, was situated the railway
station of Ugar Khurd on the meter gauge line between Miraj and Bangalore, now
changed to broad gauge.
Conditions were ideal for somebody to harness the two advantages and
exploit the fertility of the loamy soil. An abortive attempt was made in late thirties
to start a sugar industry. After that, the then ruler of Sangli invited the late
Dr.S.R.Shirgaokar - who had previous experience of setting up a sugar factory at
Kolhapur, to embark on the unexplored venture which he did with great dexterity
and the slumbering village of Ugar Khurd was transformed into a humming
industrial township in a few years. Today, Ugar is equivalent to a mini city with a
decent sized population and having agriculture concentrated employment
surrounding the sugar manufacturing focused township.

Dr. S. R. Shirgaokar deputed his competent nephew Shri.V. S. Shirgaokar
to purchase a sugar plant from Moholi Sugar Factory in Sitapur District in Bihar
and install it at Ugar Khurd. The Ugar Sugar Works hence found a very competent
navigator in one of its visionaries- Late Shri V.S.Shirgaokar. The 500 TCD plant
was purchased, installed and the first crushing season was started on the 21st of
April, 1942. The crushing capacity of the company underwent further expansion.
(10,000TCD) Presently, the crushing capacity of the organization is 14,000 TCD.
(Ugar, Unit-Tasgaon SSK, Unit-Phalatan)

Present Scenario of The Ugar Sugar Works Ltd:



The present capacity of cane crushing is 10 thousand Metric tones per day.
The work performed during the season period is in the three shifts. First Shift is from
4.00 am to 12.00 pm, second shift from 12.00 pm to 8.00 pm and third shift from 8.00
pm to 4.00 am. The crushing of sugar cane is carried out in two mills known as 33 X
66 (small mill) and 42 X 84 (big mill). The cane carried through bullock carts is
crushed in 33 X 66 and the cane carried through truck and tractors is crushed in 42 X
84. This order will change only if there is any problem to one of the mill.

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

Board of Directors:

1. Mr. Rajendra V. Shirgaokar

2. Mr. Prafulla V. Shirgaokar

3. Mr. Shishir S. Shirgaokar

4. Mr. Baba N. Kalyani

5. Mr. Bapugouda S. Patil

6. Mr. Shrikrishna N. Inamdar

7. Mr. V. Balsubramaniam

8. Dr. Mallappa R. Desai

9. Mr. Madhusudan B. Karmarkar

10. Mr. Manohar G. Joshi

11. Mr. Algonda B. Kage

12. Mr. Deepchand B. Shah



Group of Companies:

1. The Ugar Sugar Works

2. SB Reshellers Pvt. Ltd.

3. Shantaram Machineries Pvt. Ltd.

4. Sadashiva Sugars Ltd.

5. Tara Tiles Pvt. Ltd.

6. The Pavilion Hotel

1. Finance Department


Finance is the most important department in the organization. It plays very
important role in the organization. Finance is the life blood of each and every
business. Management of financing is planning and controlling of firm’s financial
resource.

The finance officer occupies a key position. He is one of the dynamic
members of the top management key, and his role day by day is becoming more
intensive and significant in solving the complex management problems.

The Finance Department is subdivided into three departments as under.

A. Accounts Department

B. Cane Accounts Department

C. Cost and Audit Department

Accounts Department: Deals with day to day financial activities of
maintaining accounts i.e. entry of day to day transactions, issue of cheque,
preparing Trial Balance, Profit and Loss Account, Balance Sheet, maintaining
Bank Accounts, Cash Management, Purchase and Sales Accounts. The books of
account maintained by the company are:

1) Sales records: Sales records are
maintained for each of the sold sugars and other product.

2) Purchase Records: Purchase records are
maintained for the purchase of various items.

3) Expenses Records: The records are
maintained for the purpose to make entry for various expenses incurred in a
particular period of time.

4) Stock Records: Stock records are
maintained to know the levels of stock of various items for the particular
period of time .These are both in terms of rupees and units.

5) Budgets: A budget provides an easy
method of continuous monitoring of activities of the organization. A master
budget, which takes into, accounts all activities of an organization.



Following are the budgets prepared:
i. Budget Profit and Loss A/C.

ii. Budget Trading A/C.
iii. Budget Fund Flow Statement.
iv. Budget Balance Sheet.
v. Sales Budget.
vi. Cash Budget.
vii. Expenses Budget.
Cane Account Department: Deals with the farmers in purchasing cane and
making time to time payment, advance payment, transporting, maintaining the
detail information through Weigh Bridge Department about weight of the cane
while it comes to the factory, maintaining daily report like Crushing Report, Sugar
Bagging Report, Baggasse and other material like Trash, Ash, Sugar, Chemicals
and other raw material in and out.

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

1. The internal audition of various areas of each and every department
including revenue and expenditure side.

2. Cost Accounting work of U.S.W. Ltd. Products like sugar, rectified spirit,
denatured spirit, power and Indian made liquor product.

3. Periodical physical checking of following departments about their
inventory books of accounts of the stores, time keeper office etc.

4. Preparation of additional data feedback for management audit committee or
any other department required.

5. Special audit of various departments like Agriculture Department, Account
Department, Time Keeper Office, R & D Department, Civil Construction
Projects, Cane Purchase Department Etc.

6. Checking of Closing Stock Statement.

7. Suggesting remedial actions in case of increased cost.

The software package used in finance department is Tally and Own Created
software by the IT Department.



2. Personnel Department

This department undertakes the activities like Recruitment, Selection,
Labour Welfare Activities, Social Activities. Department holds a meeting once in
a week with Top Management. The department has four different committees.

1. Canteen Committee

2. Work/ Grievance Cell Committee

3. Safety Committee

4. House Keeping Committee

 Labour Welfare Activities

o Statutory Provisions:

The Ugar Sugar Works provides the statutory provisions under the
Factories Act 1948 like Safety, Health Awareness, Work Environment,
Lighting, Ventilation, Drinking Water Provision, Spittoon, and Toilet. The
Labour Welfare Officer deals personally with the employee problems may be
related to workplace or personal life of the employee. He councils the
employee or worker personally and try to settle the problem.

Additional Facilities:

Education:

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



This is a playschool for the young children

Shri Hari Vidyalaya:

Shri Hari Vidyalaya is a school, which is home to over 3000 students. This
school has a curriculum which covers the following mediums of instruction
under the primary and secondary sections :

 English Medium

 Marathi Medium

 Kannada Medium

Shri Hari Vidyalaya Pre-University & Degree College:
This college is operating for a number of years
at Ugar Khurd. It has Arts, Commerce and
Science (first year) faculty’s for a Bachelors
Degree. It houses over a 1000 students

Shri Babukaka Shirgaokar Technical Educational Trusts:
Industrial Training Institute (ITI):

The ITI was started in the year 1994 in
honour of our then MD, Shri Babukaka
Shirgaokar.:



This institute provides technical training in the following disciplines

i. Fitter

ii. Electrician

iii. Instrument Mechanic

iv. Computer Technology Trade

v. Cutting and Sewing

Hospital:

The Dr. Shirgaokar Hospital is very well
equiped in the following areas:



 State of the Art Laboratory

 X-Ray Units

 An Air-conditioned Operation Theatre

 Dental and Orthopedic Section

 Accommodation for 32 indoor patients (32 beds)

 Qualified staff of doctors and nurses to take care of the
patients.

 Treatment at subsidized rates

 Eye camp every week

Quarters Approximately 132 apartments and 400
quarters provided on rent-free basis.



Biogas

Biogas supplied to workers colony (for 85 quarters at concessional
rate)

Food Grains

Food Grains are distributed to workers free of cost once in a year.
Additionally Ugar’s sugar is provided to shareholders and cane growers at a
well discounted rate.

TV Cable Connection

TV Cable connections are given at nominal charges.

Medical Camp
Organising various types of medical camps viz. Dental, Eye,
Tubectomy, ENT, Diabetic Detection Camp, Blood donation, etc.

Workers Day

Celebrating workers day on 2nd October every year and felicitating the
retired workers and high performers during the year.

Training Programme

Organizing Workers / Staff Training Programme.

Ugar Wartha

Circular of monthly Ugar Magazine.

Alcoholics Anonymous Group Meeting

Conducts the Alcoholics Anonymous meeting for the group of fellows,
who desires to give away drinking through the inter group (self-supported) of
General Service office of Alcoholics Anonymous (India). Meeting held twice
in a week.

Sakhar Shala Project

The non formal school runs for the childrens of the Harvesting
workers(Gabali) during crushing season to bridge the gap of academic year
and to keep touch with education during stay at factory(work) site, with the
help of social organizations like Lions Club & Mahila Mandal.


Awards:

Shri S V Parthasarathy's Award for
outstanding performance in sugar
industry for the
season 1984-85

National Safety Award
1984 for largest Accident
free Period

 Social Activities

Arranges Camps like “Netra Shibir”, Dental Camp, Arrangement of Place,
Water and other necessary things at the time of Laxmi Yatra once in a year.
Provides donations for other religious works, educational institutes, and sufferers
of natural calamities.

3. Information Technology (IT) Department:

IT Department distinct The Ugar Sugar Works from other sugar factories.
It has its own IT Department, which is very well developed. This department
develops the software as per the requirements of the different departments. It
efficiently solves any technical problem related to the computer hardware as well
as software in the different department. Various qualified and efficient hardware
and software engineers are there in this department.



4. Purchase Department:

This department accepts the requisitions from the different departments, in
which the material needed, quality and quantity is mentioned. They have the
vendors list and they ask quotations from them. Finally after receiving the
quotation they place the order to appropriate vendor. The purchase order has four
copies. From that one has sent to Accounts Department, one to the Vendor, one to
the department from which the requisition is received and last is retained with
themselves for reference. This department work according to the Just In Time
method. Means it does not blocks the funds of the company.

Purchase Department does not place orders for capital goods. It deals with
the materials, which are necessary to run day-to-day activities of production,
stationary material etc.

This department uses the software developed by their IT department from
FoxPro for keeping records and placing orders. Also they use the other windows
programs like Ms-Office (Ms-Word, Ms-Excel, Ms-PowerPoint) for
documentation.

5. Issue Department

This department is also known as Stores Department. The material
purchased from Purchase Office first comes to the stores department. Here the
stores incharge records the transactions means takes the stock and files the
documents received from the vendor and purchase office. Then this department
supplies or issues the material to other departments according to their need or
requisition.



6. Production Department

The Ugar Sugar Works Ltd, production department comprises the Factory
Manager with his team of Engineers and Operators. He reports to the chief i.e.
works manager. Here the main production is sugar. For producing the sugar there
is a very vast process. Engineers and operators do this process. Here one more
small but very important process joins to the process of producing sugar i.e.
chemical mixing into the cane juice. For this there is a small department called
chemical department. Then after this all process the final product i.e. Sugar
produces. Within all this some by products are also obtained like baggase,
molasses, steam etc. The production department does all above-mentioned
process. Sugar bagging i.e. production of sugar for the last season i.e. 2005-06 is

7. Cane Purchase Office Department

This department deals in purchasing cane from farmers for sugar
production. It maintains all the details of the farmer and the cane also. In these
details they mention the type of sugar cane, area, farmer name, transporter name,
no. of kilometers the place or farm is from factory etc. Then they make a bond
with the farmer for giving the cane to the factory and lastly issue the Cane
Purchase Order to the farmer.

8. Research and Development Department (R&D)

This is one of the most important department in the Ugar Sugar Works Ltd.
The company carries the research and development in Sugar cane, process
modification for sugar production, quality liquor and Ethanol production,
Improvement in Technology, Co-Generation and bio-methanation from press mud
and zero effluent discharge system. This results in Product improvement, cost
reduction, product development, import substitution etc.



Sugar Cane: The main objective of the Research and Development team is to
make continuous effort to find out dual purpose sugarcane varieties with high
sucrose, high yielding potential and reasonably high fibre content. There are 40
odd new sugarcane varieties under trial in this department.

Short Duration Crops: The work with wheat, soybean and sunflower is
reasonably successful as rotation of crops and useful indications are likely to be
obtained.

Future Plans of Action:

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

b) Replacement of Muriate of Potash by organic Bio-k, a product of SSP Plant of
concentration. Evaporation and drying system for zero pollution.

c) To locate soybean varieties resistant to rust.

d) To find out effective biological measures, which would cause no ecological
problems and shift from the paradigm of pesticidal control to biological control
so as to successfully combat white Woolly Aphid trouble (Ceratovacuna
lanigera Zehnt) with conobartha aphidivora (Dipha), Micromus Sp.(Brown lace
wing) and syrphidfly.

e) To identify multipurpose cane varieties, which can give good yields, good
recoveries, high fibre and resistant to insect pests.

f) To utilize Moist Hot Air Treatment Plant (MHAT) to prolong the life of
productive good cane varieties.

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

h) Replacing 50% chemical fertilizers with suitable combination of organic and
bio-fertilizers to get the best cane both from the point of quality and quantity.



Different Product Manufactured

The Ugar Sugar Works Limited is the flagship company of the Shirgaokar
Group of Companies. This organization is located in a township by the name-
Ugar Khurd, Karnataka, close to the border of Karnataka & Maharashtra. Ugar
Khurd is nicely located on the banks of the river Krishna.

The main businesses of parent company are manufacturing of:

1. Sugar

2. Power

3. Indian Made Liquor

4. Industrial Alcohol

5. Ethanol

1) Sugar:

The Ugar Sugar Works Limited is the largest ‘single location’ manufacturer
of sugar in Southern India with a licensed capacity of 10,000 TCD. Ugar
manufactures more than 1.5 million bags of sugar annually. The main product of



the sugar manufacturing process is White Crystal Sugar.

This white crystal sugar is manufactured in the following grades :

i. M-30

ii. S-30

iii. SS-30

Byproducts:

Bagasse:

Bagasse is a residual material left after the extraction of juice from sugar
cane. In Ugar Sugar, it is captively used as a fuel by which the industry is self
sufficient for its fuel requirement. The excess is saved to the tune of 5% of
weight of the cane crushed. The saved bagasse can be selectively used as fuel in
the lean period / off-season or sold to the interested parties.

Filter cake:

Filter Cake commonly known as Press mud is the suspended impurities
separated during the process of cane juice clarification by the sulphitation
process. The material is used as manure and the factory manages to sell the
filter cake to the cane growers at concessional rates & achieves recycling of the
matter back to fields.

Final Molasses:

It is a highly viscous left-over material containing sugar / reducing sugar
and organic/inorganic impurities. It is a raw material for distilleries of our
organization.



2) Power:

Cogeneration is a process, which simultaneously produces two or more
forms of useful energy such as electrical power and steam, electric power and
shaft (mechanical) power etc.

Ugar has been a pioneer of cogeneration in the sugar industry in India,
Over the years, The Ugar Sugar Works has reached (in 2-3 phases) a capacity
of 44 MW of power, of which 15 MW is used for captive consumption and the
balance 28 MW is fed to the grid (KPTCL).

Power shortage has made the sugar industry realize that by using high–
pressure Boilers and Turbines from the same amount of input fuel, (i.e. Bagasse)
they can generate up to 2 to 3 times more power and after meeting the captive
requirements, the surplus power can be exported to the grid.

A sugar factory requires both electrical power & process steam for its
operation. With the Indian Government announcing various fiscal incentives for
the use of non-conventional renewable energy for cogeneration in sugar factories,
it has become a viable proposition to adopt high pressure & efficient boilers using
bagasse to generate steam & power economically to make available surplus power
for export to the grid.



This is the single largest cogeneration plant in all of India using non-
conventional energy sources i.e. bagasse and trash. Our group has now started
consulting to sugar industries in India as well as in overseas through our group
company - Ugar Power Generation Consultants Pvt. Ltd (UPGCL). The focus of
this new outfit revolves around consulting on new co-generation projects,
equipment procurement, erection & implementation right up to final
commissioning in the cogeneration sector.

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

3) Indian made Liquor:

Ugar currently has two distilleries in premises at Ugar Khurd. The first one
is an old distillery of capacity 30,000 LPD, while the second one is a newly
constructed distillery from Praj Industries, Pune having a capacity of 45,000 LPD.
The Praj Distillery runs on the continuous fermentation technology. The whole
unit of distillation process is having material of construction in copper, which
gives a very good quality of spirit. This plant is having a high level of
computerization and automation.



Two distilleries with a total capacity of 75,000 bulk liters per day.
The primary products coming out of the distilleries are:

i. Rectified Spirit

ii. Indian Made Liquors

iii. Absolute Alcohol (Ethanol)

iv. Arrack

v. Industrial Alcohol

Some of the well-known brands in the marketplace are Old Castle Premium
Whisky, Old Castle Rum, US Rum, US Whisky, Vatted Malt Whisky, Sandpiper
Whisky, Gentlemans Whisky, Ugar Doctors Brandy, Gagarin Vodka and US Gin.

New Projects & Growth

Sugar Ship EOU

EOU for the Manufacture of Sugar Cubes in the form of Ships. The Ugar
Sugar Works Ltd. Has received approval for setting up a 100% Export Oriented
Unit for the manufacture of sugar cubes in the form of ships at Ugar Khurd.

The Building work is in progress and the machinery will be imported from
M/s. Klockner Haensel Processing GMBH Germany (JV Partner) who will be
providing the necessary technology. The machinery is expected to be installed



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

The entire production of sugar ships will be exported to Fragies
Verwaltung GMBH, Germany, who have agreed to purchase the entire production
of 45,00,000 boxes p.a. for a period of 5 years

Greenfield Project - Sadashiva Sugars Ltd.

Location Nainegali Village, Taluka & District: Bagalkot,
State: Karnataka.It is about 0.5 km from the

NH 13

Land Area The land measuring about 162000 sq. mts shall be
required for the entire factory and administrative
setup.

Main Product White crystal Sugar

By Products a) Cogeneration

b) Power

c) Press-mud

Licenced Capacity Sugar – 2500 TCD (expandable to 5000 TCD)
Cogeneration Power Plant – 15MW

The land acquisition and machinery procurement work is in progress. The
installation of machinery will be completed by the end of 2006 and 2006-07 will
be a trial crushing season for Sadashiva Sugars.



Greenfield Project-Jewargi

Location Malli Village, Taluka: Jewargi, Dist: Gulbarga,
State: Karnataka. It is about 15 kms from Sindagi on
the State Highway No.12

Land Area The land measuring about 162000 sq. mtrs shall be
required for the entire factory and administrative
setup

Main Product White crystal Sugar

By Products a) Cogeneration

b) b) power

c) press-mud

Licenced Sugar – 2500 TCD (expandable to 5000 TCD)
Capacity Cogeneration Power Plant – 15MW

The land acquisition and machinery procurement work is in progress. The
installation of machinery will be completed by the end of 2006 and the 2006-07
crushing season will be a trial season for this new project.

Ugar Sugar-Unit Tasgaon SSK

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

The Company has taken on lease, Tasgaon Taluka Sahakari Sakhar
Karkhana Ltd., Turchi, (Tasgaon). This plant is having a capacity of 2750 TCD per
day. The lease agreement with Tasgaon SSK has been signed for a period of 6
years.



Commercial pro Ugar Sugar-Unit Tasgaon SSK has crushed a total of 2.22
lac MT for the season 2005-06. The total bagging for this season amounts to 2.50
lac quintals.duction has commenced.

Ugar Sugar-Unit New Phaltan Sugar

The Ugar Sugar Works-Unit New Phaltan Sugar W The Company has
taken on lease New Phaltan Sugar Works Ltd., situated at Sakharwad Taluka
Phaltan Dist.Satara. This plant is approximately 100 kms from Pune.orks (Leased
Plant). This plant has a capacity of 1250 TCD. The lease agreement with New
Phaltan Sugar has been signed for a period of seven years. Commercial production
has commenced. Ugar Sugar-Unit New Phaltan Sugar has crushed a total of 1 lac
MT for the season 2005-06.



Chapter V

INTRODUCTION
ABOUT THE
DIVERSIFICATION
“FRAGIES”



Introduction about the Diversification Project

“FRAGIES”

The production of new product called “fragies” is a sugar cube in the form
of ship. This unique project is undertaken in the village Ugar-khurd, Dist:-
Belgaum , State:- Karnataka.

The company has entered into a buy-back agreement with the Fragies
Vorwaltung GMBH Germany. The project is unique in itself. It is first time in the
world such a project is undertaken, because the sugar cubes will be introduced in
the form of ship.

What are fragies:- Fragies are a floating and exciting alternative to the
rather dull sugar cubes. To allow easy dosing through their weight is exactly alike,
3 grams.

Fragies are produced of three sugar components of different states of
aggregation. The sophisticated combination makes floatable fudges out of which
the boats are formed.

“Fragies” make the ideal media for any catering, customer client, the
showbiz or the convience sector. It has a appealing look.

The fragies will be introduced in four varieties.

1.Fragies Coffee

2.Fragies Cappuccino

3.Fragies Tea

4.Fragies Taste



The color make the difference so that ‘fragies taste’ comes with an
additional flavour. As an extra effect all four varieties of ‘fragies’ exhibit a
different dissolving speed. The longer they float the more fun in cup of drinking.

By Product

Fragies will not have any by product.

Availability of raw materials, water, power.

1) Raw material:

The plant is located close to the existing sugar factory. The raw material for
fragies is sugar, which is easily and readily available. The raw material i.e. sugar
required is 10% of the production i.e. Rs226.80 lacs.

2) Water:

Ugar Khurd is blessed on its south flowed the perennial river Krishna. The
existing infrastructure at Ugar which caters for the main sugar plant is also
available for this plant.

3) Power:

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

Market for finished product:

The company has entered into buy-back arrangement with the fragies
Verwaltung GMBH, Germany. The Germany Company has agreed to buy 22.5
Million boxes (i.e. approximately 56.25 lakh Kgs.) within period of five years or
up to achievement of net profit of 3.5 Million euros by the manufacturer whichever



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

Technology and Know-how:

The Germany Company has agreed to provide the necessary technology
and Know-how. Kloeckner Hacnsel Processing GMBH, Germany, will supply the
entire machinery. The product will be manufactured as per the specification
provided by the Germany Company.

Packaging of the Product:

Proper packing of fragies is very important. As each fragies consists of just
3 gms. It is very delicate. Importance of this product lies in its shape, design. So
care should be taken that the product is handled carefully. So packaging is of
utmost important. The product will be accepted only up to maximum 2% of
defects.

Packaging will be given on contract basis. One of the company from
Ratnagiri will supply the packaging material.

Rationale of EOU Plant:

1. As it is located very close to the existing sugar plant at Ugar Khurd, the
raw material and power availability is in abundance.

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

3. The company has entered into a technological agreement with the
German company who has also agreed to the buy back the production
for a period of five years.

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



5. Sugar fragies being a futuristic and fancy product has an appeal in the
urban area across the world.

Chapter V

Financial Appraisal



Financial Appraisal

Capital Investment includes all the expenditures which are expected to
produce benefits to the firm over a long period of time, encompasses both tangible
and intangible assets. Some companies classify capital expenditure in a manner,
which provides useful information for decision-making.
Which project to be selected is one of the critical decision-making process. It
depends on certain criteria. Identifying financial appraisal of project is one of the
critically important and complex stage. The shareholder wealth maximization goal
states that the management should endeavor to maximize the net present value of the
expected future cash flows to the shareholder of the firm. NPV refers to the
discounted sum of the expected net cash flows.
The shareholder wealth maximization goal reflects the magnitude, timing and
risk associated with the cash flows expected to be received in the future by
shareholders. The NPV is discounted at the rate of cost of capital.
Cost of capital is the minimum expected rate of return. The company must earn, the
minimum return so as to satisfy the shareholders.



Chapter VII

Objectives



Objectives of the Project

7. To know the cost of the Project.
8. Time frame required to complete the Project.
9. Financing Method.
10. Cost of Finance.
11. Human Resource Required.
12. Commercial Business.
a. Preparation of Profit and Loss Account.
b. Preparation of Cash In Flow Statement.
d. Payback Period.
e. Internal Rate of Return.



Introduction
Finance is regarded as the life blood of the business enterprise. This is
because in the modern money oriented economy finance is one of the basic
foundations of all kinds of economic activities.
Decisions with regard to the investment in the current assets and fixed assets
are significant as they determine the size of the firm, financial requirement, extent of
business risks etc.
Investment decision pertains to long term investment is crucial. It is
absolutely necessary that the firm should carefully plan its investment program so that
it may get the finances at the right time and they are put to most profitable use. An
opportune investment decision can give spectacular results. On the other hand an ill
advised and incorrect decision can jeopardize the survival of biggest firm.

1. To Know the Cost of Project:
Cost of the project means the capital expenditure. It includes investment in
fixed assets. The overall cost of this new project is estimated to be Rs.22, 70,00,000
i.e. 384745.76 Euro (1 Euro = Rs.59). The main machinery costs Rs.17, 70,00,000,
which also includes erection cost. The machinery is tailor made. This machinery is
exclusively used for the production of fragies. The machine cannot be alternatively
used for production of any other products. The Germany Company has agreed to
provide the necessary technology and Know-how. Kloeckner Hacnsel Processing
GMBH, Germany, will supply the entire machinery. The cost of ancillary machinery
is Rs.2, 00,00,000. The building cost Rs.3, 00,00,000. The project building is erected



in the premises of present sugar factory. So there is no any addition investment in the
purchase of land. Here we can say that land is efficiently utilized by the organization.

Cost of Project:
Particulars Amount
Main Machinery - 17,70,00,000
Ancillary Machinery - 2,00,00,000
Building - 3,00,00,000
Total Cost of Project - 22,70,00,000

2. Time frame required to complete the Project:
This project has not still started with the production. The erection of the
building and installation of the machinery will be completed by November 2006.
The company has entered into buy-back arrangement with the fragies Verwaltung
GMBH, Germany. The Germany Company has agreed to buy 22.5 Million boxes
(i.e. approximately 56.25 lakh Kgs.) within period of five years or up to
achievement of net profit of 3.5 Million euros by the manufacturer whichever is
earlier.

After five years either the contract may be renewed or the known how will
be registered by the name of Ugar Sugar Works.

3. Financing Method:
One of the important function of finance manager is to assemble required
amount of funds from different sources. Problem of finance is not much felt by the
sole trading organization, partnership firms etc. because they are run on small scale.
But the real financial problem is faced by corporate enterprises, which are operated on



a very large scale. It is necessary to be familiar with different sources of funds for
meeting various financial requirements of an organization. The method of collecting
funds is linked up with the period and the purpose for which funds are required. It is
also necessary to consider the cost of capital before taking any decision relating to the
selection of sources funds supply.
The Ugar Sugar Works Ltd. Is a Public Ltd. Company under private sector.
Public company is a company where the shareholders are more than fifty. Ugar Sugar
Works has 18000 shareholders with share capital of Rs.9 Cr. These shares are listed
in Bombay stock exchange with the face value of Rs.1 each.
As per the Companies Act of 1956 the company is allowed to issue only
equity share. The company cannot issue debentures and preference shares. The
additional fund requirement is fulfilled by borrowings i.e. long-term loans.
A firm’s capital generally consists of own fund and borrowed funds that
represent combine investment in a business. The optimum capital structure is one that
maintains the ideal ratio between different types of securities issued by the company.
For this new project i.e. the production of fragies the company has not issued
any equity shares. It has raised funds through internal/retained earnings i.e. promoters
contribution and borrowings. This unit is 100% export oriented.

Promoters contribution: Promoters contribution is nothing but the retained earnings.
The entire amount of profit is not distributed by the way of dividend to the
shareholders. It is also referred to as self- financing or internal financing or re-
investment. It is nothing but the re-investment of on savings accumulated over the
years by transferring certain portion of the net profit to the reserves of a company.
When the company uses the fund of one unit to the unit, it is known as Intra
Fund Transferring. It is a most economical method of financing. It is an ideal source
of financing for expansion, modernization and diversification. It is neither expensive
nor subject to any legal complications.

Borrowings / Loans: Generally loans are meant to serve the long term financial
purposes of a business concern. Loans represent and advance granted on a separate
account called loan account. Interest is charged on the whole amount sanctioned to
the customers.



The loan is borrowed from Robo Financial Institution, Singapore Branch at
rate of 4.5%. The company will get the loan in the form of Euros, which will be then
converted, into Indian currency. The company has to pay back the loan again in the
form of Euro. As the devaluation of currency is subject to fluctuation the company,
uses forward cover/hedging to avoid risk. After every 6 months this forward
cover/hedging is renewed.
Capital Structure:
Particulars Amount
Borrowing / Loan from Robo International - 14,16,00,000
Promoters Contribution / Internal Fund - 8,54,00,000
22,70,00,000

4. Cost of Financing / Capital:
Cost in simple terms means sacrificing something such as time, money,
material, man hours for the production of goods any other factor, it too has cost.
The project’s cost of capital is the minimum required rate of return on funds
committed to the project, which depends on the riskiness of its cash flows. The
investment project undertaken by a firm may differ in risk, each one of them will have
its own unique cost of capital. Cost of capital determines the suitability of investment
proposals. When a company has before it, two different investment proposal, in order
to select best investment proposal, which will give more return, the calculation of cost
of capital is essential.
Thus the cost of capital is “The Rate that must be paid to obtain funds for
business activities”. It is the minimum rate of return a company earns on its
investment in order to give expected income to the equity shareholders.

Significance of Cost of Capital:

a. Investment Evaluation:
The primary purpose of measuring the cost of capital is its use as a financial
standard for evaluating the investment project. In the NPV method, an investment
project is accepted if it has a positive NPV. The project’s NPV is calculated by



discounting its cash flow by the cost of capital. In the sense, the cost of capital is the
discount rate used for evaluating the desirability of an investment project. In the IRR
method, the investment project is accepted if it has an internal rate of return greater
than the cost of capital.

b. Designing Debt Policy:
The debt policy of a firm is significantly influenced by the cost consideration.
The interest tax shield reduces the overall cost of capital, though it also increases the
financial risk of the firm. In designing the financial policy, that is, the proportion of
debt and equity in the capital structure, the firm aims at maximizing the firm value by
minimizing the overall cost of capital. The cost of capital can also be useful in
deciding about the methods of financing at a point of time.

c. Performance Appraisal:
The cost of capital framework can be used to evaluate the financial
performance of the top management. Such an evaluation will involve a comparison of
actual profitability of the investment projects undertaken by the firm with the
projected overall cost of capital, and the appraisal of the actual cost incurred by the
management in raising the required fund.

Component of Cost of Capital:
The cost of capital consists of different sources of capital.
i. Cost of Equity
ii. Cost of Preference Shares
iii. Cost of Retained Earning
iv. Cost of Debt

i. Cost of Retained Earning:
Undistributed and accumulated profit represents Retained Earning. Retained
Earning is also a source of funds that can be used by a company conveniently without
having to pay any dividend on these funds. Therefore, it is assumed that the source of



finance is cost free. In fact, retained earnings have opportunity cost. The opportunity
cost of retained earning is dividend sacrificed by the shareholders. Had this dividend
been paid to the shareholders, they would have invested on some other company
shares and earned at least a minimum rate of return which is calculated in a similar
manner as the cost of equity capital, without giving effect to income tax and
brokerage cost consideration.

Computation of cost of Retained Earnings:
Kr = Ke ( 1 – t ) ( 1 – b )
Here:
Kr = Cost of Retained Earning
Ke = Cost of Equity
T = Tax Rate
B = Brokerage Rate
Ke = 8%
T = Nil
The project is 100% export oriented so the tax is exempted.
B = Nil
∴Kr = Ke ( 1 – t ) ( 1 – b )
∴Kr = 8%

ii. Cost Debt Capital:
Cost of debt capital is the rate of return expected by the lenders. It is the rate
of interest and debt advance. Therefore cost of debt is equal to the rate of interest
payable on debt (before tax). Interest payable by the company is subject to tax
deduction. Hence, cost of debt before tax should be adjusted for tax effect.
Computation of cost of Debt after tax:
Kda = kd ( 1 – t )
Here:
Kd = Cost of Debt before Tax
Kda = Cost of Debt after Tax
T = Tax Rate

Kd = 4.5% i.e. the interest rate
T = Nil
The project is 100% export oriented so the tax is exempted.



∴ Kda = kd ( 1 – t )
∴ Kda = 4.5% ( 1 – t )
∴ Kda = 4.5%

Weighted Average Cost of Capital (WACC):
In financial decision making, overall cost of capital known as composite cost
of capital is more useful than specific cost of capital. Overall cost of capital is an
average of the cost of each source of funds employed by the company. Weighted
average method is one of the methods of calculating the overall cost of capital.
WACC is the weighted average of the cost of different sources of finance,
weights being attached on the basis of proportion which each source of finance bears
to the total fund. According to ICMA (London) Weighted Average Cost of Capital is
the average cost of company’s finance weighted according to the proportion each
element bears to the total pool of capital, weighing is usually based on market
valuation current yields and cost after tax.
Weighted Average Cost of Capital plays an important role in determining the
capital structure, because the optimum capital structure lies at that point where
WACC is minimum. In the evaluation of investment project, WACC is considered to
be the minimum rate of return required from a project so as to enable the firm to pay
an expected rate of return to the investors.

Computation of Overall Cost of Capital
Name Capital Proportion Cost of WACC
Capital After
Tax
Retained Earnings / Promoters 8,54,00,000 37.62% 8% = 0.08 3.00%
Contribution
Borrowings/Debt 14,16,00,000 62.37% 4.5% = 0.045 2.80%
22,70,00,000 100% 5.80%

WACC = 5.80%



Computation of Cost of Debt after Tax.
Kda = kd ( 1 – t )
∴ Kda = 4.5% ( 1 – t )
∴ Kda = 4.5%

Computation of Cost of Retained Earnings.
∴Kr = Ke ( 1 – t ) ( 1 – b )
∴Kr = 8%

Working Note:
1. Calculation of proportion of different sources of capital.
8,54,00,000
a. Proportion of Retained Earnings =
22,70,00,000
= 37.62%

14,16,00,000
b. Proportion of Debt =
22,70,00,000
= 62.37%
Option II:
The company if totally depends on equity the cost of capital is 8%. Which is
more than WACC.
If the company totally depends upon borrowing the cost of capital is between
8% to 9%, which is again more than the WACC.
Therefore the optimal capital structure is one which has comprises Debt and
Equity. As per the workout the cost of capital is less when the capital structure
consists of different sources, which can be concluded from the above computations.



5. Human Resource Required:
The machinery used for the production of fragies is fully automatic. It
requires maximum 10 skilled employees to control the machinery. It is estimated that
other 35 workers will be needed for packaging and loading of finished product.
Therefore the total workers required are estimated to be 45.
The 10 skilled employees are given special training to handle the machinery.
The expenses incurred for training is 7.5 lakhs. Every year the unit has to incur the
expense of Rs.1.5 lakhs for food hygiene.



6. Commercial Business:
a. Preparation of Projected Profit and Loss Account
Particulars 30/09/06 30/09/07 30/09/08 30/09/09 30/09/10 30/09/11
Income
Gross Sales - 2369.21 2493.90 2493.90 2493.9 2618.60
0
Less: Excise Duty - - - - - -
Net Sales - 2369.21 2493.90 2493.90 2493.9 2618.60
0
Expenditures
Raw Materials Consumed - 226.80 226.80 226.80 226.80 226.80
Purchase of traded items - - - - - -
Store spares etc. consumed - - - - - -
Subtotal(A) - 226.80 226.80 226.80 226.80 226.80
Power, Fuel and Water - 184.05 184.05 184.05 184.05 184.05
Repairs and Maintenance - 32.85 32.85 32.85 32.85 32.85
Staff Cost - 37.13 40.84 42.88 42.88 42.88
Depreciation and Amortisation - 292.14 248.08 210.73 179.08 152.25
Subtotal(B) - 546.16 505.81 470.51 438.86 412.03
A+B - 772.96 732.61 697.31 665.66 638.83

Opening WIP - - - - - -
Closing WIP - - - - - -
Cost of Goods Produced - 772.96 732.61 697.31 665.66 638.83
Opening Stock of Finished - - 38.65 36.63 34.87 33.28
Goods
Closing Stock of Finished - 38.65 36.63 34.87 33.28 -
Goods
Cost of Production - 734.31 731.63 699.08 667.24 672.11
Gross Profit - 1634.89 1759.27 1794.82 1826.6 1946.49
6
Admin & Selling Exp - 532.00 540.10 540.10 540.10 548.21
Interest Cost 28.28 50.90 39.59 28.28 16.97 5.66
Operating Profit (28.28) 1052.00 1179.58 1226.44 1269.5 1392.62
9
Other Incomes - - - - - -
Profit before Tax (28.28) 1052.00 1179.58 1226.44 1269.5 1392.62
9

b. Preparation of Cash In Flow Statement.



An analysis of cash flows is useful for short run planning. A firm needs
sufficient cash to pay debt maturing in the near future, to pay interest and other
expenses and to pay dividend to shareholders. The firm can make projections of cash
inflows and outflows for the near future to determine the availability of cash.

Cash inflow statement for the year 2007

Particulars Amount
Sales Revenue - 23,69,21,000
Less: Operating Expenses
Raw Materials - 2,26,80,000
Power, Fuel and Water - 1,84,05,000
Repairs and Maintenance - 32,85,000
Staff Cost - 37,13,000
Administration - 5,32,00,000
Interest Cost - 50,90,000
Depreciation - 2,92,14,000
PBT - 10,13,34,000
Add: Depreciation - 2,92,14,000
Cash In Flow - 13,05,48,000

Particulars Amount



PBT - 11,81,59,000
Cash In Flow - 14,29,67,000

Particulars Amount
PBT - 12,28,21,000
Cash In Flow - 14,38,94,000

Cash Inflow Statement for the Year 2010
Particulars Amount
PBT - 12,71,17,000
Cash In Flow - 14,50,25,000

Cash Inflow Statement for the Year 2011
Particulars Amount



PBT - 14,25,90,000
Cash In Flow - 15,78,15,000

CHART SHOWING ESTIMATED ANNUAL CASH FLOWS

180000000
160000000
140000000
120000000
CASH FLOWS IN RS

100000000 YEAR
80000000 CASH INFLOWS
60000000
40000000
20000000
0
2007 2008 2009 2010 2011
YEAR



The reorganization of the time value of money and risk is extremely vital in
financial decision-making. If the timing and risk of cash flows is not considered the
firm may make decisions that may allow it to miss its objectives of maximizing the
owner’s welfare. The welfare of owners would be maximize when wealth or NPV is
created from making financial decisions.

Time Preference for money:
Time Preference for money is an individual’s preference for possession of a
given amount of money now, rather than the same amount at some future time. Most
individuals value the opportunity to receive money now higher than waiting for one or
more periods to receive the same amount.
Three reasons to the individuals time preference for money –
I. Risk – As an individual it is not certain about future cash receipts he/she
prefers receiving cash now.
II. Preference for Consumption – Preference for consumption over future
consumption of goods and services either because of urgency of their present
wants or because of the risk of not been in a position to enjoy future
consumption.



III. Investment Opportunities – Most individuals prefer present cash to future
cash because of available investment opportunities to which they can put
present cash to earn additional cash.

Required Rate of Return :
The time preference for money is generally expressed by an interest rate. This
rate will be positive in the absence of any risk. It may be therefore called the risk free
rate. The required rate of return may also be called the opportunity cost of capital of
comparable risk.

Present Value:
Present Value of a future cash flow (inflow or outflow) is the amount of
current cash that is of equivalent value to the decision maker. Discounting is the
process of determining present value of a series of future cash flows.

Net Present Value:
Net present value of a financial decision is the difference between the present
value of cash inflows and present value of cash outflows. In the NPV method, an
investment project is accepted if it has a positive NPV. The project NPV is calculated
by discounting its cash flow by the cost of capital.

Computation of Net Present Value:

Year Cash Inflow Discount Rate Present Value of
@ 6% Cash Flow
I. 13,05,48,000 0.943 12,31,06,000
II. 14,29,67,000 0.890 12,72,40,000
III. 14,38,94,000 0.840 12,08,70,000
IV. 14,50,25,000 0.792 11,48,59,000
V. 15,78,15,000 0.747 11,78,87,000
60,39,62,000



Present Value of Cash Flow = 60,39,62,000
Less: Investment = 22,70,00,000
Net Present Value 37,69,62,000

d. Payback Period

This is traditional method of evaluating the investment project. It is also
known as Pay Off method of Capital Budgeting. Under this method, time required to
recover the original cost of investment through the income, it generates is found out to
measure the suitability of project. In other words, pay back period implies, the
number of years required for capital expenditure to pay for itself. An investment
project the cost of which can be recovered within a shortest period of time can be
adjudged to be an ideal investment project. In order to determine the pay back period,
the net income generated by investment project without depreciation is considered.
Net income after charging tax but before depreciation is determined in order to know
the actual cash generated by a project. Pay back period represents length of time
required to recover the original cost of investment through the cash flows generated
by it.
If the cash flow is constant for all the years the pay back period can be
ascertained with the help of following formula.
Cost of Investment
Pay Back Period =
Net Cash Benefits after Tax

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



Computation of Pay Back Period
Cash Inflow Cash Outflow /
Investment
13,05,48,000 22,70,00,000
14,29,67,000 9,64,52,000
14,38,94,000
14,50,25,000
15,78,15,000

Pay Back Period = 1 Year 8 Month

For Rs. 14,29,67,000 = 12 Months
For Rs. 9,64,52,000 = ?
= 9,64,52,000
* 12 Months
14,29,67,000
= 8 Months

e. Internal Rate of Return:
This is one of the discounted cash flow methods of evaluating investment
projects. It is also known as yield method, marginal efficiency of capital method,
time adjusted rate of return method etc. This method gives time value to money by
applying appropriate discount rate to the future cash flows. Internal rate of return
method attempts to find out present value of streams of net cash inflows resulting
from an investment project to equate with the present value of cash outflows.
An appropriate discount rate cannot be found out at stretch. Internal rate of
return is nothing but the rate of earning of an investment project. It is the discounting
rate which equates present value of total net cash inflows resulting from an
investment proposal with the present value of total cash outflows. If the internal rate
of return is higher than the cut off rate the investment project may be accepted,
otherwise rejected. In case of single investment project, if the internal rate of return is
greater than the cut off rate, the project will be accepted and if it is less than the cut
off rate is rejected.

Excess NPV Over Cost Difference Between



IRR = Lower Rate + of Investment * Lower Rate and
Difference Between NPV Higher Rate
Calculate at Higher Rate
& Lower Rate

Computation of IRR
Computation of IRR Discount Rate @ 6%
@ 6% Cash Flow
I. 13,05,48,000 0.943 12,31,06,000
II. 14,29,67,000 0.890 12,72,40,000
III. 14,38,94,000 0.840 12,08,70,000
IV. 14,50,25,000 0.792 11,48,59,000
V. 15,78,15,000 0.747 11,78,87,000
60,39,62,000

@ 40% Cash Flow
I. 13,05,48,000 0.714 9,32,11,000
II. 14,29,67,000 1.224 17,49,91,000
III. 14,38,94,000 1.589 22,86,47,000
IV. 14,50,25,000 1.849 26,81,51,000
V. 15,78,15,000 2.035 32,11,53,000
1,08,61,53,000

Computation Of IRR Discount Rate @ 50%
@ 50% Cash Flow
I. 13,05,48,000 0.667 8,70,75,516
II. 14,29,67,000 0.444 6,34,77,348
III. 14,38,94,000 0.296 4,25,92,624
IV. 14,50,25,000 0.198 2,87,14,950
V. 15,78,15,000 0.133 2,08,31,580



24,26,92,018

@ 60% Cash Flow
I. 13,05,48,000 0.625 8,15,92,500
II. 14,29,67,000 0.391 5,59,00,097
III. 14,38,94,000 0.244 3,51,10,136
IV. 14,50,25,000 0.153 2,21,88,825
V. 15,78,15,000 0.095 1,49,92,425
20,97,83,983

Investment = 22,70,00,000
Higher NPV Over Investment = 24,26,92,018
Lower NPV Over Investment = 20,97,83,983

Excess NPV Over Cost Difference Between
IRR = Lower Rate + of Investment * Lower Rate and
Difference Between NPV Higher Rate
Calculate at Higher Rate
& Lower Rate

IRR = 50% + 1,56,92,018 * ( 60 – 50 )
3,29,08,035
= 50 + 4.76
= 54.76 %



Chapter VIII

SWOT ANALYSIS



SWOT Analysis
Strength:
1. Assured Market: The Market is assured for final Product. Verwaltung
GMBH, Germany will take the final product.
2. Unique Project: The production of sugar cubes in the shape of ship will be
introduced first time in the market.
3. Availability of Raw Material: Sugar is the raw material for the production
of fragies, which is easily available from the existing sugar factory. The plant
will even not face the shortage of power and water, as it is available from the
existing main plant.

Weakness:
1. Employee Requirement: The employees required should be highly skilled
and trained.
2. Maintenance & Repair: For the maintenance and repair of the machinery the
company has to depend on the contracted company.

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



Opportunity:
1. International Market: It is the good opportunity to enter in the International
Market.
2. To Nation: It helps nation to earn foreign currency.

Chapter IX

FINDINGS


Findings

Profit & Loss Account:
From the estimated profit and loss account it is estimated that the cost of
production will gradually go on decreasing. The production is almost constant. The
profit will also go on increasing gradually.

Financing Method:
The project is financed through debt and promoters contribution in the ratio of
1.6 : 1. The accepted debt equity ratio is 2 : 1. As the ratio of debt is 1.6 the capital
structure is in good position. The unit in case of need of cash can still borrow the
debt.

Cost of Capital:
The capital structure for this project consists of debt and promoters
contribution. The project has three options of financing.
Option-I. 100% Borrowings. If the project is 100% financed through
borrowings the cost of capital would be between 8% to 9%.



Option-II 100% Equity. If the project is 100% financed through equity the
cost of capital would be 8%.
Option-III. The project is actually financed through borrowings and promoters
contribution. As we have seen in the earlier computation, the overall cost of capital is
5.80% i.e. 6%.
Hence, the cost of capital of the project is less.

Net Present Value:
Net Present Value of this project is 37,69,62,000. As per the acceptance rule
positive NPV is accepted. As the NPV of this project is positive, we can say that the
project can be accepted.

Pay Back Period:
An investment project the cost of which can be recovered within a shortest
period of time can be adjudged to be an ideal investment project. As per the
calculation the pay back period of this project is very short i.e. just 1 year 8 months,
which is very profitable.

Internal Rate of Return:
If the internal rate of return is higher than the cut off rate the investment
project may be accepted, otherwise rejected. In case of single investment project, if
the internal rate of return is greater than the cut off rate, the project will be accepted.
The cut off rate of this project is 6% and IRR is 54%. Hence this project is very
profitable to the company.
Overall we can say that the project will turn to be very profitable to the
company.



Chapter X

BIBLIOGRAPHY

BIBLIOGRAPHY

1. FINANCIAL MANAGEMENT BY I M PANDEY
2. FINANCIAL MANAGEMENT BY KHAN AND JAIN
3. FINANCIAL MANAGEMENT BY A D BHAT
4. COMPANY WEBSITE
5. MAGAZINES
6. ANNUAL REPORTS


Financial Appraisal of Diversification Project at Ugar Sugar Works

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