INTRODUCTION

INVESTMENT

Investment is putting money into something with the hope of profit. More specifically, investment is the
commitment of money or capital to the purchase of financial instruments or other assets so as to gain
profitable returns in the form of interest, income,(dividends), or appreciation (capital gains) of the value
of the instrument.. An investment involves the choice by an individual or an organization, such as a
pension fund, after some analysis or thought, to place or lend money in a vehicle, instrument or asset,
such as property, commodity, stock, bond, financial derivatives (e.g. futures or options), or the foreign
asset denominated in foreign currency, that has certain level of risk and provides the possibility of
generating returns over a period of time.

The investment decision

Management must allocate limited resources between competing opportunities ("projects") in a

process known as capital budgeting. Making this capital allocation decision requires estimating
the value of each opportunity or project: a function of the size, timing and predictability of future
cash flows.

Capital investment decisions

Capital investment decisions are long-term corporate finance decisions relating to fixed assets
and capital structure. Decisions are based on several inter-related criteria. Corporate management
seeks to maximize the value of the firm by investing in projects which yield a positive net
present value when valued using an appropriate discount rate. These projects must also be
financed appropriately. If no such opportunities exist, maximizing shareholder value dictates that
management return excess cash to shareholders. Capital investment decisions thus comprise an
investment decision, a financing decision, and a dividend decision.

Objective of investment decision

 Simplifying administration
 Reducing tax on income and capital gains
 Deferring tax on income and capital gains
 Minimizing risk of investment
 Improving after tax investment return
Kinds of investment decision

Tatical decision
It generally involes a relatively small amount of funds and does not constitute
a major departure from the past practices of the company.

Strategic decision

It involves a large sum of money and may also result in major departure
from the past practices of the company . acceptance of a strategic investment decision involves a
significant change in the company’s expected profits associated with ahigh degree of risk.

KINDS OF CAPITAL INVESTMENT PROPOSALS

A firm may have several investment proposals for its consideration. It may adopt one of them,
some of them or all of them depending upon whether they are independent, contingent or
dependent or mutually exculsively.

Independent proposals
These are proposals which do not compete with one another in a way that acceptance of one
precludes the possibitity of acceptance of another . In case of such proposals the firm may
straightway “accept or reject” a proposal on the basis of a minimum return on investment requried.
All those proposala which give a higher return than a certain desired rate of return are accepted and
the rest are rejected.

Contingent or dependent proposals

These are proposala whose acceptance depends on the acceptance of one or more other proposals.
For example a new machine may have to be repurchased on account of substantial expansion of
plant . In this case investment in the machine is dependent upon expansion of plant. When a
contigent investment proposal is made , it should also contain the proposal on which it is
dependent in order to have a better perpective of the situation.

Mutually exclusive proposals

These are proposals which compete with each other in a way that the acceptance of one prdicts the
acceptance of other or others. For example , If a company is considering investment in one or two
temperature control systems acceptance of one system will rule out the acceptance of another.
Some technique has to be used for selecting the better or best one. Once this is done , other
alternatives automatically get elliminated
Factors affecting investment decision
The Amount of Investment
In case a firm has unlimted funds for investment it can accept all capital investment proposals
which gave rate of return higher than minimum acceptable or cut-off-rate . However most firm
have limtd funds and therfore capital rationing has to be imposed.

Computation of captial investment requried

The term captial investment requried refers to the net cash outflows which is the sum of all
outflows and inflows occuring at zero time period . the net outflow is determined by taken into
account the following factors

Cost of new project

Installation cost

Amount paid for an asset; not its market value, insurable value, or retail value. It generally
includes freight-in and installation costs, but not interest on the debt to acquire it.

Working captial

Investment in a new project may also result in increases or decreases of net working capital
requriements. A part of this increase in current asset may be offsets by increase in current liabilities
, this amount should therefore be taken as apart of the initial capital. The investment requried in
the form of net working captial will be recovered at end of the life of the project. However ,
investment in working captial and the recovery of working captial will not balance each other on
account of time value of money. Generally all captial investment proposal for increasing revenue
require additional working capital, while almost all captiqal investment proposals for reduction in
cost resut in saving of working capitqal by increasing the firm’s operational efficiency.

Proceeds from sale of asset

A new asset may be purchased for replacement of an old asset. The old asset may therefore be
sold away. The cash realized on account of such sale will reduce the cost of new investment.

Tax effects

The amount of profit or loss on the sale of the assets may affect the cashflows account of tax
effects. The profits/ loss is ascertained by taking into account the cost of the asset, its book value
and the amount realized on its sale. The tax liabilty of the company will be different in each of the
following cases:

A. When the asset is sold at is book value

B. When the asset is sold at aprice higher than its book value but lower than its cost
 C. When the assets is sold at a price higher than its cost
D. When the asset is sold at price lower than its book value

Investment allowance

This is allowed toencourage captial investment in machinery and equipment . India this allowance
at 20% of the cost of new machinery and equipment for calculating income tax liability for year in
which such asset was put into service.

Minimum Rate of Return on Investment

The management expects a minimum rate of return on the capital investment. The minimum rate
of return is usually decided on the basisi of the cost of captial .

Cut-off-point

The cut off point refers to the point below which a project would not be accepted. For example , if
management desires that the investment in the projects should be recouped in three yerar the period
of the three years would be taken as the cut off period. A project incapab;le of generating necessary
cash to pay for initial investment in the project within three years, will not be accepted.

Return expected from the investment:

Capital investment decisions are made in anticipation of increased return in the future. It is
therefore very necessary to estimate the future return or benefits accruing from the investment
proposals. There are two criteria available for quantifying benefits from capital investment
decisions. They are (i) accounting profit and (ii) cash flows. The term accounting profit is
identical with income concept used in accounting. While in estimating cash flows, depreciation
charges and other amortization charges of fixed assets are not subtracted from gross revenue,
because no cash expenditure is involved.

Determination of economic value

While making capital budgeting decisions, a firm is interested in determining the economic value
of the project which can only be determined by comparing the cash inflows (benefit) with the
cash outflows associated with the project. The firm can by comparing them find out for itself
whether the future economic inflows are sufficiently large to warrant the initial investment It,
therefore, falls to reflect the original need for cash at the time of investment. It also does not
bring out clearly the actual size of cash of inflows and outflows and investment.

(iii) Time value of money

Under usual accounting practices revenue is considered to be realized not at the time when the
cash is received but at the time the sale is made. It means the amount of profit shown by the
books may be simply a paper figure if the sales are not realized. Similarly, expenditure is
recognized as being made not when the payment is made out but at the time it is incurred. Thus,
the time taken in realizing or making payments is completely ignored. The cash flow approach
recognizes the time value of money by comparing actual cash inflow and cash outflows.

Ranking of the investment proposals:

When a number of projects appear to be acceptable on the basis of their profitability the projects
will be ranked in order of their profitability in order to determine the most profitable project.
Ranking of capital investment proposals is particularly necessary in the following two
circumstances;

I. Where capital is rationed and there is a limit in funds for investment

II. When two or mor investment opportunities are mutually exclusive, only one
opportunities can be undertaken.

Risk and uncertainty:

Different capital investment proposals have different degrees of risk and uncertainty. There is
a slight difference between risk and uncertainty. Risk involves situations which the
probabilities of a particular event incurring are known whereas in uncertainty, these
probabilities are not known. Of course in most oases these two terms are used interchangeably.
Risk in capital investment decisions may be due to general economic conditions, competition,
technological developments, consumer preferences, labour condition etc. On account of these
the revenues , costs and economic life of a particular investment are not certain.

Types of investment risks that are associated with a company

Cash flow risk is the uncertainty regarding future cash flows.

Business risk is the uncertainty associated with operating cash flows of a business. There are
different dimensions of business risk, namely sales risk and operating risk.

Financial risk is the uncertainty associated with how a firm finances its business (that is, debt vs.
equity). We measure this with the degree of financial risk

Default risk is the uncertainty associated with the payment of required cash flows of a security
(that is, the interest or principal of a bond) when promised.
Reinvestment rate risk is the uncertainty associated with the yield on the reinvestment of
intermediate cash flows (e.g., the interest earned on a bond). The longer the maturity (all other
features the same), the more the reinvestment rate risk. The greater the coupon rate (all other
features the same), the more the reinvestment rate risk

Interest rate risk is the sensitivity of a security's price to the change in market yields. The longer
the maturity of a bond (all other featues the same), the more the interest rate risk. The greater the
coupon rate of a bond (all other features the same), the less the interest rate risk.

Currency risk is the uncertainty associated with changes in the relative value of currencies

Tools and techniques

There are several methods for evaluating and ranking the capital investment proposals. In
case of all these methods the main emphasis is no the return which will be derived on the
capital invested in the project. In other, words, the basic approach is to compare the
investment in the project with the benefits derived therefore..
Following are the main methods generally used:
 Pay back period
 Discounted cash flow method
 Net present value
 Present value index
 Accounting rate of return
INDUSTRY PROFILE

Automobile dealers are the bridge between manufatures and the customers. New car dealers are
primarly in retailing new cars sport utility vechile passenger and cargo vans. New car dealers
employ more than 25-30 workers in the industry.Most new car dealers sell these new vechile in
combination with other activities such as repair services, retailing quality used cars and selling
replacement parts and accessories these dealers offer one stop shopping forcustomers who wish
to buy finance and services their next vechile sales and account for only one out of the ten jobs
in the industry.

The indian commerial vehicles (CV) industry has a long histroy , possible dating back to
the passenger vehicles. TELCO, the first entrant in the segment , continues to be the largest one
to date , with a market reach unrivalled by its competitors . TELCO pioneered production of
commerical vehicles in the country with technical collaboration with daimler-benz of germany in
1954

The entry of ashok leyland , with technology from british leyland, marked the beginning
of competition in the truk and bus segment. The next major change in the automobile industry
came about in late eighties, when the superior Japenese Light Commerical Vechicles (LCV)
made their debut in India. This brought to the fore the critical role of indigenisation as ameans of
ensuring steady growth and survial during difficult times.

The managerial playesrs in the commerical vechile industry like Hindustan Motors , Premier
AutomobilesLTD and standard Motors Pvt Ltd withdrew from LCV market in late eighties due
to stiff compettion in passenger car market and their inability to compete in the CV market . the
commerical vehicle (HCV and LCV combined) sales have increased from 6,66,664 in 2008to
7,87,269 in 2009 at a CGAR of 49.29%

The industry comprises two/three wheelers, passenger cars, Multi Utility Vehicles (MUVs),
commercial vehicles and tractors. Investment activity in the automobile industry has centered on
Car-MUV segment, which has seen the entry of a host of foreign manufacturers. The number of
car manufacturers has gone up from three in the early 90’s to more than ten at present. The two-
wheeler segment has seen termination of foreign collaborations and the domestic players striking
out on their own and doing well. Commercial vehicles and tractors are still dominated by
established Indian players. While the two-wheeler segment witnessed an impressive growth
largely due to growth in the motorcycle segment, the LCV and MUV segments saw fall in sales.
While the HCV segment stagnated, car segment grew by about 5%. Indian automobile industry is
well protected with the import tariffs being as high as 60% for new completely built units
(CBUs) and 105% for old vehicles.
Industry features
The industry is highly capital intensive in nature. Though three-wheelers and tractors have low
barriers to entry in terms of technology, other segments are capital and technology intensive.
Costs involved in branding, distribution network and spare parts availability increase entry
barriers. With the Indian market moving towards complying with global standards, capital
expenditure will rise to attune to future safety regulations.

The industry is highly fragmented in nature. In the last ten years, supply has outstripped
demand, as multinationals and domestic players have set up large-scale manufacturing facilities
to meet future needs. As a result, there is an absence of pricing power with manufacturers.
Competition is expected to increase further, as global majors are planning to enter India either
through direct investment or imports.

Presence of a large number of players especially in the passenger car and two wheeler
segments has ensured stiff competition. Competition is based both on technology and more
importantly price. Key to success is therefore value added products but at affordable prices.
Since customers of all segments of the automobile industry are value conscious, factors such as
fuel efficiency and diesel engines are also key differentiators in the Indian market. The Indian
consumer is now having an increasing choice with large number of vehicle models launched
each year. In line with the growing income of the Indian middle class the entry-level vehicle is
moving up the ladder. The entry-level two-wheeler has become the scooter instead of moped and
the preferred family vehicle is the more expensive motorcycle instead of scooter. Mopeds, or low
capacity engine vehicles, are now more stylish and are preferred only by students. In the
passenger car segment, the B class vehicles, consisting of the more powerful hatchbacks are the
fastest growing segment, indicating an increasing affluence of an entry-level car buyer. The
capacity utilization, which also has a critical bearing on the profitability, has been low for
Commercial vehicle, Car and MUV segments while it has been healthy for the two-wheeler
segment.
 As far as the auto sector is concerned, we expect demand for two-wheelers to grow at a
CAGR of 10% to 12% in the next three years. At the same time, passenger car and
commercial vehicle sales are likely to grow at a slower rate in FY06 as compared to the last
three years. This is on the backdrop of higher fuel costs, increase in finance charges and the
likelihood of prices increasing in the near-term in an effort to comply with the new emission
norms. If an investor wishes to invest in auto stocks, it is better to go for those companies
that have diversified segment and market presence (not just leveraged on India) to lower their
risks.

Trends in output prices

Competition ushered in by liberalization measures, has not only brought down prices of all
categories of products but also expanded the product range and turned the Indian market into
buyer’s market. The WPI of all automobile categories except mopeds was lesser than the all
commodity WPI during the period 1994-2002. The product range for both budget as well as
value added models have expanded. Compliance with the increasingly stricter emission
norms has led to some increase in prices with moped segment being the worst affected.
Prices are expected to fall in the medium to long term, due t0o increase in competition and
growth in scale of operations due to continuous growth, especially in the passenger vehicle
segments.
The first six months of the current financial year saw that sales and production of vehicles
(cars and utility vehicles) have gone up.  Domestic sales of passenger vehicles raised by 32
percent during first six months of this fiscal compared to the corresponding previous period.
Sales of motorcycles, the largest selling sub-segment of two-wheelers, grew by 6.7 per cent
during the same period.  And, cumulative sales of the commercial vehicles segment as a whole
also went up by about 18 percent.

The growth in the sale of commercial vehicles is closely depending on two factors like
Agricultural freight movement and Industrial freight movement.  The commercial vehicles
segment has grown by 27 per cent in 2002-03.  Over the years, despite the fact that the growth
has been healthy, large inventories piled up during the boom period of 1997-98, has affected the
growth of CV segment adversely.  This situation is changing and the demand pick up will
certainly help to make the industry.  The commercial vehicles sales were the highest in the last
six years and the medium and heavy commercial vehicles market share was up at 60 per cent. 
Also the Company Ashok Leyland managed a 24 per cent growth in volumes in the
domestic market during 2002-03.

The Cv segment displayed a strong of 20% in 2003.  A total of 3.01 lac vehicles were sold
during the year, compared to 1.58 lac in the year 2002.  Both contributed the growth, the MHCV
and the LCV segment which saw sales rising by around 28%.  MHCV’s contributed to nearly
60% of the total sales, while the share of LCV’s was 40%.  The overall growth in CV’s was
largely due to a sharp rise in the domestic sales which jumped 30.4% at 1.91 Lac units, while
exports declined 9.8% 10704 units.                                                               
 COMPANY PROFILE

About Ashok Leyland

Ashok Leyland is one of India’s leading manufacture of commercial vehicles. Eight out of ten
metro state transport buses in India are from Ashok Leyland. At 70 million passengers a day,
Ashok Leyland buses carry more people than the entire Indian rail network.

From 18 seater to 82 seater Double Decker buses, from 7.5 tonne to 49 tonne in haulage
vehicles, from numerous special application vehicles to diesel engines for industrial, marine and
genset applications, Ashok Leyland offers a wide range of products.

For over five decades, Ashok Leyland has been the technology leader in India's Commercial
vehicle industry, moulding the country's commercial vehicle profile by introducing technologies
and product ideas that have gone on to become industry norms.

Ashok Leyland vehicles have built a reputation for reliability and ruggedness. The 375,000
vehicles we have put on the roads have considerably eased the additional pressure placed on
road transportation in independent India.

The share of goods movement by road arose from 12% in 1950 to 60% in 1995. In passenger
transportation, the jump is equally dramatic: from 25% to 80%. At 70 million passengers a day,
Ashok Leyland buses carry more people than the entire Indian rail network.
In the populous Indian metros, four out of the five State Transport Undertaking (STU) buses
come from Ashok Leyland. Some of them like the double-decker and vestibule buses are unique
models from Ashok Leyland, tailor-made for high-density routes.

HISTORY

The origin of Ashok Leyland can be traced to the urge for self-reliance, felt by independent
India. In 1948, Ashok Motors was set up in what was then Madras, for the assembly of Austin
Cars.

In 1950 started assembly of Leyland commercial vehicles and soon local manufacturing under
license from British Leyland. With British Leyland participation in the equity capital, in 1954, the
Company was re-christened as Ashok Leyland.

Since then Ashok Leyland has been a major presence in India's commercial vehicle industry with
a tradition of technological leadership, achieved through tie-ups with international technology
leaders and through vigorous in-house R&D.

Ashok Leyland started manufacture of commercial vehicles in 1955, with technology from and
equity participation by Leyland Motors Ltd., UK.

In 1987, the overseas holding by Land Rover Leyland International Holdings Limited (LRLIH) was
taken over by a joint venture between the Hinduja Group, the Non-Resident Indian
transnational group and IVECO Fiat Spa, part of the Fiat Group and Europe's leading truck
manufacturer.

In the journey towards global standards of quality, Ashok Leyland reached a major milestone in
1993 when it became the first in India's automobile history to win the ISO 9002 certification.

The year 1994 was also the year, when international technology changed the way India
perceived trucks.
A new breed of world-class trucks - technologically superior and eco-friendly - rolled out on
Indian roads from our state-of-the-art manufacturing plant at Hosur, near Bangalore. 'Cargo'
brought with it, a new set of values and unmatched benefits, ushering in a revolution

The more comprehensive ISO 9001 certification came in 1994 and ISO 14001 certification for all
vehicle manufacturing units in 2002.

MAJOR MILESTONE

Year Milestone achieved

1966 Introduced full air brakes

1967 Launched double ducker bus
1968 Offered power steering in commercial vehicles
1979 Introduced multi axle trucks
1980 Introduced the international concepts of integral
Bus with air suspension
1982 Introduced vestibule bus
1992 Won self certification status for defense supplier
1992 Launched vestibule buses
1993 Received ISO9002
1997 India’s first CNG powered bus joined the best fleet
2001 Received ISO 14001 certification for all the
Manufacturing units
2002 Launched hybrid electric vehicle
2003 Launched turbo power Tarus2516 readymade Vehicle
2004 Won award for export promotion council for
Export performance
 2009 Roll out modern city buses
2010 Introduced Neptune engine roaring power house

Manufacturing locations / Distribution Network

 9 Manufacturing Plants: at Ennore, Hosur, Bhandara, Alwar, Hyderabad and Chennai

 50 Dealers operating thru’ 129 outlets
 135 Authorized Service Centers
 293 Parts Distribution Networks
 The products are buses, trucks, engines, defence, special vehicle

Joint venture
 Nissan motors
 John degree
 Automotive infotronics
 Ashley Alteams India’s pvt ltd

Association companies
 Automotive coacher &companies Ltd ACCL
 Lanka Ashok Leyland
 Hinduja foundries
 IRIZAR-TVS
 Ashok Leyland Project services
 THE PLANTS

ENNORE PLANT

Spread over 127 acres, Ashok Leyland Ennore is a highly integrated mother plant accounting for
over 50% of ALL's total production. The plant manufactures a wide range of vehicles and houses
production facilities for important aggregates such as engines, gearbox, axles and other key in-
house components.

ALWAR PLANT
Established in 1982, the Alwar Unit, in Rajasthan, is primarily an assembly plant for a wide
range of vehicles with an emphasis on passenger chassis, including CNG buses

BHANDARA UNIT

Ashok Leyland's Bhandara Unit is also an assembly plant for vehicles, but in addition, houses
modern manufacturing and assembly facilities for sophisticated synchromesh transmission.

HYDERABAD PLANT

The Ductron Casting Unit (DCU) at Hyderabad is Ashok Leyland's in-house supplier of Grey
and Spheroidal Graphite Iron castings. Formerly known as Ductron Castings Ltd, this unit was
acquired by Ashok Leyland in 1990 to augment the foundry capacity of the Group. DCU was
awarded the ISO 9002 certification in 1995.

HOSUR PLANT

Ashok Leyland’s brand new Cab Panel Press Shop is an imposing addition to the industrial
skyline of Hosur. At 800 m above sea level, it is also the tallest in the Hosur industrial belt. This
state-of-the-art facility is housed in a 99-acre expanse with a built up area of over 15,000 sq.m.
The Shop is equipped to stamp select panels for Cargo cab, G-45 and C-45 FES - totally, 55
panels and their variants. Right now it houses eight presses and has the provision to
accommodate four more. The versatility of the presses can be utilized for making panels of
complex shapes and profiles with appropriate tooling and dies. In addition to catering to our
present needs, the Press Shop can take up additional panels of new / current models. Right at the
design stage, a rainwater harvesting facility was integrated into the Shop. A 60,000-sqm lawn
and the 2,500 saplings planted recently in the premises will give the Shop a cool, green cover.
Built with an investment of Rs 1350 million, the Shop is designed and developed to be a state-of-
the-art facility. The 210m long Press Shop consists of two bays with a 36m span in each bay. The
24m high Press bay has an underground tunnel, 7.1m deep and 90m long, to handle the end bits
generated during the process of panel pressing. The other bay is 17m high.
 THE PRODUCT RANGE

Ashok Leyland products come with a promise of durability and economics of operations
throughout its product life. A comprehensive customer care support right from consultancy to
after market support is always there.

Ashok Leyland offers comprehensive product range with trucks from 7.5T GVW to 125T GTW,
buses from 19 to 80 seaters, a host of special application vehicles and diesels engines for
industrial, genset and marine applications. The traditional of technology innovation and
reputation for ruggedness, reliability and operational; economy has created a market preference
for Ashok Leyland Vehicles.

Product Range

Passenger Goods Special Engines

Cargo Heavies

ICV Haulage LCV / ICV Haulage Industrial

 Stag Comet 1611 Haulage Defence
Comet super Cargo 759 Hippo
MDV Comet CG1613 Cargo 909 Beaver Stallion 4x4 Marine
 Viking AL Tusker Super 1616 Cargo 100.12 Yak 4x4
 Viking Hino Bison Tractor HMV 6x6
 Cheetah AL Comet 4x4 MDV Haulage FAT 6x6
 Cheetah Hino Hippo LRV 4x4
Tipper Cargo 1512 Beaver
Rear Engine Bus Comet C03/3 Cargo 1614
Comet C03/10 Dumper/Tipper Fire Fighter
 Panther Bison Tipper
 Cruiser Taurus 6x4 ALRD 20 RIV 4x4
Cargo 909 CFT F23 6x6
CNG Bus Tractor Cargo 1614

 Viking Super Comet 2614

Tusker 3516
 Double Decker
Multi-axle
 Vestibule Bus
Tusker Super 6x2
Taurus 6x2
Taurus Turbo 6
OBJECTIVE OF STUDY

PRIMARY OBJECTIVE

 To evaluate the investment prosposal

 To evaluate the ROI,whether it is effective or not
 To understand various investment decision

SECONDARY OBJECTIVE

 To analysis the ( NPV, IRR) of the past 2years

 To know the variance buget of Ashok leyland
 To compare the actual with the calculation of NPV,IRR for past 2 yrs
 To suggest the trend for next one year (2011-12)
 To find out whether a set of investment proposal should be undertaken when the firm is
in capital constrained
 To find the best way of funding mix of equity and debt

Need of the study

 The need for the study is to know about the capital investment decision
 To analysis the return on investment (ROI) of the last 2yrs
 To suggest the trend for the next one year
 To study about the capital investment decision and factors that affects in investment