Choose any organization of your choice and find out the investment
appraisal method, that the organization follows Write a detail note on your visit?
Ans. Introduction to the company (The Jai Bharat Machine Tools Ltd)
The Jai Bharat Machine Tools Ltd .was established in 1971. To start with, 500 workers, 35 Technicians and 15 technical officers were working in the company. At present the total strength has gone to 3000 workers 150 technicians and 30 officers.
The Jai Bharat Machine tools usually get 2 or 3 projects every year I visited its head office to find how they appraise the investments before starting any project.
I found that they were using many methods for investment appraisals. I will explain the methods which they are as follows:-
1. Net Present Value Criteria
Jai Bharat Machine Tools is using Net present value methods. This method is based on the economic reasoning of discounted future cash flows to make them comparable. If we represent the discount rate by ‘r’
we can say that rupee received at the end of nth year is equivalent to1 (1+r)”. This is known as discount factor . According to NPV criterion, investment on the project by Jai Bharat Machine Tools Ltd.
is profitable of the present value of the sum of cash inflows over the life or the project is greater than the present value of its cash outflows.
The discounted present value method of investment appraisal involves- gross present value and net present value .
The gross present value of a stream of receipts R.......Rn
Once all the future receipts have been discounted to their present value, we can find net present value This helps the company to know whether the project is worth taking or not.
NPV = GPV – C
where C = initial cost of the project (including the installation charges and other expenses as increased in the working capital required by investment)
2. Benefit Cost Ratio
The second method of appraisal used by Jai Bharat Machine Tools Ltd is benefit-cost ratio. This is a variant of above method. It is the ratio of present value of the stream of net cash flows of a project over its life span to the initial cost of the project
That is
[ ∑ R1I (1+1) 1] + Co. ......
=1
Where Net Benefit Cost Ratio = BCR – 1
The decision rule in case of BCR criterion is ( as accepted by the company)
Accept the project If the value of NBCR is greater than zero
(3) Internal Rate of Return Criterion
The Jai Bharat Machine Tools Ltd. also follows Internal rate of return criterion. The procedure and concept was cleared by Mr. Hari Devaram chandhari who is in the company for the last 5 years. According to him, the internal rate of discount is that reduces the present value of the income streams of cash flows to equality with the initial cost. Instead of taking a specific discount, rate this method helps in finding that discount rate which sets the net present value of the project equal to zero. The object is to find that percentage return on investments which will equate the discount cash inflows to the cost of the investment The internal rate of return (r) can be computed with the help of the following equation:
n
Co = ∑ Rt / (1+r)
t=1
Where Co = initial investment
t = time period from year O to year n
r = Interest rate of return
Note: I have visited the Jai Bharat Machine Tools last month. According to Kisan Gundappa Devare, who is working for the Past 9 years, only these three methods are used for the purpose investment appraisal.
Posts
