A STUDY ONCAPITAL BUDGETING

AT BHARAT HEAVY ELECTRICAL LIMITED

Project report submitted inPartial fulfillment for the award of

MASTER OF BUSINESS ADMINISTRATION

Submitted by:JOYICE JOCABBearing Roll No.

08J41E0018

Submitted in partial fulfillment for the award of theMaster of Business Administration

DEPARTMENT OF MASTER OF BUSINESS ADMINISTRATION

MALLA REDDY ENGINEERING COLLEGESponsored by CMR Educational Society)

Approved by AICTE & Affiliated to JNTU, Hyderabad.Maisammaguda, Dhullapally, (Post via Hakimpet), Secunderabad-14

Ph:-040-65918418, Fax:-040-23792153, E-mail: aochmrec@rediffmail.com

CERTIFICATE

This is to certify that the project is on the “CAPITAL BUDGETING ” by JOYICE JACOB bearing the Roll No:08J41E0042 Of the department of MBA is a bonafide work done under the guidance of Mr.MOHAN RAO, Associate Professor and submitted to JNTU.

Date:Place:

Head of the Department Internal Guide External Examiner

DECLARATION

I hereby declare that the project entitled “CAPITAL BUDGETING from BHEL, Hyderabad submitted to MALLAREDDY ENGINEERING COLLEGE”, Hyderabad in partial fulfillment of the requirements for the award of the degree “MASTER OF BUSINESS ADMINISTRATION “. The project is an original work done by me and to the best of my knowledge this work is not submitted to any other college or university for the award of any other degree, diploma or fellowship.

Date: JOYICE JACOBPlace: 08J41E0018

ACKNOWLEDGEMENT

The satisfaction that accompanies to the success of the task would be incomplete without mentioning the names of the people, whose constant guidance and encouragement crown all effects with success. I consider it as my privilege to express my gratitude and respect to all those who guided, inspired and helped me in the completion of my project work.

I would like to thank BHEL, Hyderabad for giving me an opportunity to under go a project in their esteemed organization. I express my sincere gratitude to Mr. S.SATISH KUMAR, Relationship Manager and other personnel staff for guiding and encouraging me to the completion of project on time.

I heartily thank Mr. B.Samuel Sushanth, Head of the Department and Internal Guide Mrs.G.V.Venela, Assistant Professor, Malla Reddy Engineering College, Dhulapally, Secunderabad for their continuous guidance, monitoring and Encouragement.

Finally, I would like to thank my parents and friends for their moral support.

Date: M.RATNAKERPlace: 08J41E0042

CONTENTS

1. COMAPNY PROFILE.

2. THEORITICAL ASPECTS OF CAPITAL BUDGETING

3. CAPITALS BUDGETING IN BHEL

4. DATA ANALYSIS AND CONCLUSION

5. FINDINGS AND CONCLUSION RECOMMENDATION AND SUGGESTIONS

6. DATA ANALYSIS AND INTERPRETATION

7. BIBLIOGRAPHY

CHAPTER 1

COMPANY PROFILE

BHEL –AN OVERVIEW:

BHEL is the largest engineering and manufacturing enterprise in India in the energy-related/infrastructure sector, today.

BHEL was established more than 40 years ago, ushering in the indigenous Heavy Electrical Equipment industry in India - a dream that has been more than realized with a well-recognized track record of performance. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77. 

BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation, Renewable Energy, etc. The wide network of BHEL's 14 manufacturing divisions, four Power Sector regional centre’s, over 100 project sites, eight service centers, 18 regional offices and one subsidiary enables the Company to promptly serve its customers and provide them with suitable products, systems and services -- efficiently and at competitive prices. The high level of quality & reliability of its products is due to the emphasis on design, engineering and manufacturing to international standards by acquiring and adapting some of the best technologies from leading companies in the world, together with technologies developed in its own R&D centers.

BHEL caters to core sectors of the Indian Economy:

1. Power Generation and Transmission,2. Industry,

3. Transportation, 4. Renewable Energy,

Power Generation and Transmission:

Power Generation Sector comprises thermal, gas, hydro and nuclear power plan business. The company manufactures 220/235/500/540 MW nuclear turbine-generator sets. Custom-made hydro sets the power plant equipment manufactured by BHEL is based on contemporary technology comparable with the best in the world, and is also internationally competitive.

The company has proven expertise in plant performance improvement through renovation, modernization and up rating of a variety of power plant equipment, besides specialized know how of residual life assessment, health diagnostics and life extension of plants.

Industries:

BHEL manufactures and supplies major capital equipment and systems like captive power plants, centrifugal compressors, drive turbines, industrial boilers and auxiliaries, waste heat recovery boilers, gas turbines, pumps, heat exchangers, electric machines, valves, heavy casting and forgings etc. to a number of industries other than power utilities like metallurgical, mining, cement, paper, fertilizers, refineries and petro-chemicals, etc. BHEL has also emerged as a major supplier of controls and instrumentation systems, especially distributed digital control systems for various power plants and industries.

Transportation:

Most of the trains on Indian Railways, whether electric or diesel powered are equipped with BHEL’s traction propulsion system and controls. The systems supplied are both with conventional DC drives and state of the art AC drives. India’s first underground metro at Kolkata runs on drives and controls supplied by BHEL.

Renewable energy:

BHEL has been manufacturing and supplying a range of renewable energy system and products. It includes solar energy system namely PV modules, PV power plants, solar lanterns, street lighting, solar pumps and solar water heating system. A large no of small hydro power stations have also been completed. New areas like wind power generation etc. are also being explore for entry.

ABOUT BHEL RAMACHANDRAPURAM UNIT:

The Ramachandrapuram unit of Bharat Heavy Electricals Limited (BHEL) has achieved its highest-ever turnover of Rs. 5,004 crore and a record profit of Rs. 930 crore during the year 2009-10.

The company registered a 21 per cent increase in turnover as compared to Rs. 4,149 crore and 24 per cent increase in profit from Rs. 753 crore in the previous fiscal despite global instability, stiff competition and critical input constraints. BHEL Ramachandrapuram has set a target of achieving a turnover of Rs. 6,651 crore in the current fiscal, envisaging 33 per cent growth.

Announcing the company's results here on Monday, BHEL Ramachandrapuram general manager (in-charge) R. Krishnan said the unit had a healthy order book of Rs. 15,264 crore and it was facing a major challenge in meeting the contractual requirements. It was, therefore, decided to accelerate manufacturing and project delivery for which initiatives such as outsourcing of finished assemblies, pre-order advance manufacturing and process improvements were being taken.

He said the unit was contemplating to significantly enhance capital investment for capacity expansion during the current fiscal and Rs. 205 crore, 60 per cent higher than the previous year's Rs. 128 crore, had been earmarked towards this end.

Mr. Krishnan said the company was gearing up to meet super critical applications as adoption of super critical technology was essential for the low carbon growth strategy of the country. BHEL had also

initiated steps to enter into technology tie-ups for higher capacity compressors to cater to the ever-increasing demand from fertilizer plants and refineries.

In line with its commitment to expand manufacturing capacity to 20,000 MW by 2012, BHEL had invested more than Rs. 200 crore during the previous year while the company was fully on track to surpass the strategic plan target of Rs. 7,000 crore by the end of 2011-12

Evolution and growth of BHEL Hyderabad unit :

The Hyderabad Unit of BHEL is located at Ramachandrapuram which is around 30KM from the historic city of Charminar .   Foundation Stone of the Plant was laid in 1959 and the production commenced in the year 1965.  The Unit was set up mainly to manufacture 60MW and 110MW Steam Turbo Generator sets for State Electricity Boards and also 12 MW TG Sets. From this small beginning, the Ramachandrapuram Unit has been growing steadily in different phases of development and today it caters to a wide spectrum of business in Power, Industry, Transmission, Oil and Gas.  It now boasts the largest number of products under a single roof as compared to any of the other BHEL Units.        

Phase. I     -    Project Implementation & Technology   absorption (1959-70)

       Phase. II    -    Diversification (1971-78)

Phase.III    -    Technology upgradation (1979–85)

       Phase.IV   -     Market orientation (1985-91)

      Phase.V    -     Adaptation to liberalization (1992-2002)

       Phase.VI   -     Modernization and Capacity enhancement (2003-2012)

ABOUT B.H.E.L RAMACHANDRAPURAM UNIT:

As a member of the prestigious “BHEL” family”, BHEL – Hyderabad has earned a reputation as one of its most important manufacturing units, contributing its lion’s share in BHEL Corporation’s overall business operation

The Hyderabad unit was setup in 1963 and started its operations with manufacture of turbo-generator sets and auxiliaries for 60 and 110 MW thermal utility sets.

Over the years it has increased its capacity range and diversified its operations to many other areas. Today, a wide range of products are manufactured in this unit, catering to the needs of variety of industries like fertilizers & chemicals, petrochemicals & refineries, paper, sugar, steel, etc.,

BHEL – Hyderabad unit has collaborations with world renowned MNC’s like M/S General Electric, USA, and M/S Nuovo pig none, etc.

HISTORY OF BHEL:

BHARAT HEAVY ELETRICALS LIMITED (BHEL) is one of the pioneers in engineering industries in the world. The vital role played by the BHEL today in the country is the mark of its continuous effects to improve the service in the nation by consultancy, manufacturing and offering services in Power section.

The success story of BHEL how ever goes back to 1956 when its first plant was set up in BHOPAL. Three major plants in Haridwar, Hyderabad and Tiruchirapalli followed this. These plants have been the core of BHEL’s effects to grow and diversify and become one of the most Integrated Power and Industrial Equipment manufacturers in the world. The company now has 14 manufacturing units, 8 service centers and 4 Power stations spread all over India and abroad.

BHEL manufactures over 180 products under 30 major product groups and meet the needs of core sector like Power, Industry, Transmission, Defense, Telecommunications, Oil business etc. Its products have established on enviable reputation for high quality and reliability. This is due to the emphasis placed all along on Design, Engineering and manufacturing to International Standards by acquiring and adapting some of the best technologies developed in its own centers. BHEL has acquired ISO 9000 certification for quality management and ISO14001 certification for Environment Management. BHEL caters to the needs of different sectors by Designing and Manufacturing according to the needs of its Clients in Power sector.

BHEL Ramachandrapuram unit to upgrade gas turbine facility

THE BHEL Ramachandrapuram unit has decided to upgrade its gas turbine facility with an initial investment of Rs 34 cores during the current financial year. The investment is essentially directed towards procuring machinery to strengthen the existing infrastructure, according to Mr. A.N. Jagadeeswaran, Executive Director.

Buoyed by the good performance in the gas turbine sector, BHEL is also diversifying into advanced class turbines, low-cost steam turbine generators and export markets, Mr. Jagadeeswaran told Business Line.

With orders from Kazakhstan, Iran, Oman in hand, the company was exploring markets in Algeria, Nigeria, Iran, Bosnia and other Latin American countries. Plans had also been firmed up for the manufacture of gas turbine-driven compressors for gas transportation/LNG projects, he said.

The Ramachandrapuram unit is also focused on upgradation of gas turbines and retrofitting for low emissions. The BHEL unit, achieved a turnover of Rs 1,533 cores during fiscal 2001-02. It is pinning its hopes of quick turnover growths in the power sector. The Union Power Ministry has set an ambitious target of adding about one lakh MW of power during the Tenth and Eleventh Five-Year plans.

BHEL had also equipped itself to provide expertise in life extension studies for the existing power plants in the country, he said.

In the power sector, BHEL units wants to diversify into setting up small, biomass-based power plants of the size of 10-15 MW. "There is a definite demand for such compact alternate energy units and we propose to capture this market with our advantages", he added.

The Ramachandrapuram unit has emerged as an important contender for the 660 MW supercritical power plant of NTPC proposed in Madhya Pradesh. The company has identified a foreign consortium partner and the bid for the project is to be executed on a turnkey basis, as for the NTPC's 500 MW Simhadri power plant in Andhra Pradesh, he said.

In the area of pumps and heaters, BHEL units had signed up MoUs with Sulzer Pumps of Switzerland for the design, upgradation and retrofit of different pumps.

INTERNATIONAL OPERATIONS

BHEL has exported its equipment and services to over 50 countries. In Malaysia, BHEL has supplied 80% of the Boilers besides several Hydro sets and Gas Turbines. BHEL equipment are in operation in Matta, Cy, Saudi Arabia, Oman, Egypt, Libya, Greece, Bangladesh, Srilanka, Iraq, Australia etc. BHEL exports turnkey power projects of Thermal, Hydro, Gas based types, Substation projects Rehabilitation project besides a wide variety of product like Insulators, Transformers, Valves, Motors, Traction Generators and services for Renovation and Modernization and Operation Power station.

RESEARCH AND DEVELOPMENT (R & D)

BHEL is one of the few companies world wide involved in Development of Integrated Gasification Combined Cycle (IGCC) Technology, which word uses in clean Coal Technology. BHEL R & D efforts have produced several new products. Some of the recent successful R & D products are Automated Storage Retrieval Systems, Automated Guided Vehicles for Material Transportation, Automatic Robotic Welding Systems.

HUMAN RESOURCE AND DEVELOPMENT (HRD) The greatest strength of BHEL is its highly skilled and committed people. Every employee is given equal opportunity to develop himself and improve his position. Continuous training and retraining a positive work culture and participation style of management have led to the Development of a motivated work force and enhanced Productivity and Quality.

COMPANY VISION, MISSION AND VALUES:

VISION A world Class, Innovation, Competitive and Profitable Engineering Enterprise Providing total Business Solutions. MISSION

To be the leading Engineering Enterprise providing Quality products System and services in the field of Energy, Transportation, Industry, Infrastructure and other potential areas.

VALUES

Meeting commitments made to External and Internal customers. Faster learning, Creativity and Speed of response. Respect for Dignity and potential of Individuals. Loyalty and Pride in the Company. Team playing. Zeal to Excel.

Integrity and Fairness in all matters

OBJECTIVES

GROWTHTo ensure a steady growth by enhancing the competitive edge of BHEL in existing Business, new areas and International operation so as to fulfill National expectations from BHEL.

PROFITABILITY To provide a reasonable and adequate return on Capital employed, Primarily through improvements in Operational efficiency, Capacity Utilization and Productivity and generate adequate Internal

resources to Finance the company’s growth. Confidence in providing increased value for this money through International Standards of Product, Quality, Performance and superior customer services.

TECHNOLOGY

To achieve Technology excellence in operations by development of Indigenous Technologies to and efficient absorption and adaptation of Imported Technologies to suit Business needs and priorities and provide a competitive advantage of the company.

IMAGE

To fulfill the expectation which stock holders like Government as own, employees, customers and the country at large have from BHEL.

PRODUCT PROFILE

BHEL manufactures a wide range of Power plant equipments and also caters to the industry sector.

The products profile includes

Gas Turbines

Steam Turbines Compressors Turbo generators Pumps Pulverizers Switchgears Solar Water Heating Systems Oil Rigs Electrics for Urban Transportation System

GAS TURBINES

BHEL - the largest Gas Turbine manufacturer in India, with the state-of-art facilities in all areas of Gas Turbine manufacture provide complete engineering in-house for meeting specific customer requirement. 

With over 100 machines and cumulative fired hours of over four million hours, BHEL has supplied gas turbines for variety of applications in India and abroad. BHEL also has the world’s largest experience of firing highly volatile naphtha fuel on heavy duty gas turbines.

STEAM TURBINES

BHEL has the capability to design, manufacture and commission steam turbines of up to 1000 MW rating for steam parameters ranging from 30 bars to 300 bars pressure and initial & reheat temperatures upto 6000C. Steam Turbines are manufactured under technical collaboration with Siemens, Germany covering the whole rang of requirements for Drive, Cogeneration, Captive Power, Utility and Combined Cycle applications. BHEL today, is fully equipped to provide comprehensive service to clients covering system engineering, equipment design, and turnkey erection and commissionin

COMPRESSORS

BHEL made its foray into Centrifugal Compressors in the year 1970 with technical collaboration from Nuovo Pignone, Italy and since then has been catering to the Fertilizer, Refinery, Petrochemical and other process industries. BHEL today, has built up a cumulative experience of more than 30 million hours of operation for various applications.

BHEL offers CENTRIFUGAL compressors for pressures as high as 350Kg/Cm2 and flows upto 350,000 Nm3/Hr. BHEL has the unique capability of offering the Compressor with any kind of drive being a manufacturer of Gas Turbine, Steam Turbine as-well-as Motors and can offer the Compressor station fully tested as per the requirements.

BHEL offers total package of Compressor with its drive and all the associated auxiliaries which includes inter-stage coolers, separators, lube oil and sealing systems, anti-surge control systems, instrumentation and controls and process gas and cooling water piping for supporting the compressor for continuous and trouble free operation.

Compressors are made as per API Standards/Specification as

 API 610 Centrifugal Pumps

 API 611 Auxiliary Steam Turbines

 API 612 Drive Steam Turbines

 API 613 Gearbox

 API 614 Oil Systems

 API 616 Drive Gas turbines

 API 617 Centrifugal Compressors

 API 670 Instrumentation

 API 671 Couplings

 API 672 Packaged, Integrally Geared 

 Compressors

 API 676 Positive Displacement Pumps

 IS 325 Auxiliary Electric Motors

 ASME PTC 10 Performance Test

 ASME Sec. VIII & IX Heat Exchangers

TURBO GENERATORS

BHEL presently has manufactured Turbo-Generators of ratings upto 560 MW and is in the process of going up to 660 MW. It has also the capability to take up the manufacture of ratings up to 1000 MW suitable for thermal power generation, gas based and combined cycle power generation as-well-as for diverse industrial applications like Paper, Sugar, Cement, Petrochemical, Fertilizers, Rayon Industries, etc. Based on proven designs and know-how backed by over three decades of experience and accreditation of ISO 9001, the Turbo-generator is a product of high-class workmanship and quality. Adherence to stringent quality-checks at each stage has helped BHEL to secure prestigious global orders in the recent past from Malaysia, Malta, Cyprus, Oman, Iraq, Bangladesh, Sri Lanka and Saudi Arabia. The successful completion of the various export projects in a record time is a testimony of BHEL's performance.

PUMPS

BHEL started manufacture of Pumps during the mid-sixties under technical collaboration with M/s Sigma Latin, Czechoslovakia, to meet the requirements of 60 MW, 110 MW and 210 MW thermal power stations, the scope of which was widened to meet the requirements of power plants up to 500 MW, with the help of another collaboration with M/s Weir Pumps, U.K. BHEL has also made some in-house product development to gain spin off benefits from the above collaboration as well as to develop new pumps to meet the requirements of Combined Cycle Power plants.

BHEL has undertaken a design up-gradation and retrofit of the existing 200 KHI Boiler Feed pumps Inside Stators with energy efficient hydraulics and cartridge design internals under technical tie-up with M/s Sulzer Pumps, Germany; and recommended the upgraded 200 KHI-S Boiler Feed pump to all customers of 110 MW & 210 MW Power Stations operating with the earlier Czech design for increase of pump availability and reliability and also considerable reduction in operational costs.

PULVERIZERS

BHEL manufactures mills for pulverized coal fired Thermal and Industrial boilers. BHEL till date has manufactured over 1200 bowl mills and over 100 tube mills, operating in different coal fired Thermal power stations in India.

BHEL has absorbed technology from world leader M/s. Combustion Engineering USA for bowl mills. The specific range - 583 XRP/XRS to 1043 XRP covers the-state-of-the-art mills required for the Indian market and are supplied as Industrial boilers as-well-as Utility boilers of 60 MW, 110 MW, 120 MW, 210 MW, 250 MW & 500 MW capacities.

To meet the requirement of very high ash content coal with high moisture, BHEL in collaboration with M/s Stein Industry, France of the ALSTHOM group, manufactures Ball Tube Mills for Tower-type Boiler as-well-as conventional Boiler. These are horizontal mills that grind coal by impact and attrition. They do not lose any of their grinding characteristics with time, and provide constant fineness throughout the service life of their wear parts. They are the only mills truly adapted to both, very abrasive high -ash coals and very low volatile coals which require very fine grinding.

SWITCHGEARS

BHEL is involved in the design, commissioning and service of a wide range of Switchgears catering to various applications like power station auxiliaries, power distribution, process industries, rural electrification, open cast mines, electric traction and other special applications. BHEL started manufacturing circuit breakers in 1965 in collaboration with ASEA, Sweden and to keep pace with the technological advancement and to meet customer requirements, SF6 technology was introduced in 1981 in collaboration with Siemens, Germany for manufacture of 145 kV to 420 kV class circuit breakers. BHEL also introduced Vacuum Circuit Breakers in the range of 3.3 kV to 33 kV and the present range also includes the indigenously developed and successfully tested 'Gas Insulated Switchgear' for 36 kV range.

Over 750000 Circuit Breakers of different media (Air, Oil, Vacuum and SF6) with variety of operating drives (spring & hydraulic), supplied by BHEL are rendering trouble free service all over the country and abroad. The switchgear designs are fully type tested as per the I.E.C and I.S standards.

SOLAR WATER HEATING SYSTEMS

BHEL a pioneer in the field of design manufacturing and installation of solar water heating systems (SWHS) in the country till date have installed systems covering more than 74,000 m2 of absorber area of capacity over 37 Lakh liters per day. The largest over SWHS of 40000 LPD for space heating is in use at Dr. Willmar Schwa be India Pvt. Ltd. Noida.

Solar water heating systems are environmental friendly, pollution free equipments, harnessing the abundantly available Sun's energy. They find application at homes, hostels, hotels, and hospitals (swimming pool, bathing, washing, cleaning and cooking); in industrial process heating (Textile, Food processing, Pharmaceutical, Dyeing, Breweries, Metal Plating industries); Milk dairies and chilling plants; space heating in central air conditioning systems; pre-heating of boiler feed water. 

In the BHEL make Solar Collector, stabilized efficiency values up to 65% is assured under normal circumstances over a long period without degradation.

OIL RIGS

BHEL started manufacturing oil field equipment in collaboration with M/s US Steel Engineers and Consultants USA (National Oil well), M/s Sky top Brewster USA, M/s Branham Industries USA, M/s IRI International, USA. After successful absorption of technology, BHEL now has the capability to manufacture conventional deep drilling rigs up to a depth of 9000 meters, mobile rigs to a depth of 3000 meters and well servicing rigs to a well depth of 6100 meters. BHEL is authorized by the American Petroleum Institute (API) for manufacturing products under specification API 4F, API 7K and API 8A.

BHEL also undertakes refurbishment, up gradation and renovation of the existing rigs with the customers to provide better flexibility of operation for faster drilling, and higher availability of rigs. 

BHEL, since the first order for oil rigs in 1977, has manufactured and supplied 84 nos. drilling and well servicing rigs to both M/s ONGC Ltd. and M/s Oil India Ltd., that are deployed for drilling and well servicing operations. In addition BHEL has upgraded 3 nos. rigs by installing Independent Rotary Drive system.

BHEL offers services for refurbishment and modernization of the rigs and rig equipment of both BHEL make and also others. This includes 

Total inspection of rig equipment  Major overhauling of rig equipment  Supply of spares (for BHEL make rigs)  Refurbishment of rig equipment  Repairs on mast and substructures and reassessment of

  the structure  Up gradation of rigs  Supply and installation of Independent Rotary Drive system on the conventional

drilling rigs.ELECTRICS FOR URBAN TRANSPORTATION SYSTEM

25 KV AC, 50 HZ, single phase, broad gauge/metre gauge, Electrical Multiple Units with DC Drives.

1500V DC, broad gauge/meter gauge, Electric Multiple Units with DC Drives. 25 KV AC/1500 VDC broad gauge Electrical Multiple Units with 3 phases drive.  Diesel Electric at Multiple Units Metro Railway. Tram Cars

SWOT ANALYSIS OF BHEL

The strength, Weaknesses, Opportunities and Threats which are being experienced by BHEL as a growing concern have been summarized up in the following lines.

STRENGTHS

Vast pool of Trained Man Power. Excellent state of art facilities. Good working atmosphere. Rapport between Management and Union. Product manufactured to International Quality. Low labour Cost and Low manufacturing cost.

WEAKNESSES

Excess Man Power. Slippage in delivery commitments. System implementation inadequate. No Financial package. Inadequate compensation package to employees.

OPPORTUNITIES Growing Power Sector Machinery. Liberalization has opened up the market. Navratna company status. Dominant player in Domestic Market. Expert potential growing.

THREATS

Liberalization – Entry of MNC’s or Private sector – more competition MNC’s taking away good employees with attractive packages. Government taxation policy – against manufacturing sector.

CHAPTER – 2

THEORATICAL ASPECTS OF CAPITAL BUDGECTING

AN OVERVIEW OF FINANCIAL MANAGEMENT

EVOLUTION OF FINANCIAL MANAGEMENT:-

Financial management emerged as distinct field of study at the turn of the 20 century.Its evolution may be divided into three broad phases.

TRADITIONAL PHASE:-

It begins the early 1940ss and continued through the early 1950s.Though the nature of financial management during this phase was similar to that of the traditional phase, greater emphasis was placed on the day-to-day problems faces by financial managers in the areas of funds analysis, planning and control. The focus shifted to working capital management.

MODERN PHASE:-

It begins in the mid 1950s and has witnesses an accelerated pace of development with the infusion of ideas from economic theory and application of quantitative methods of analysis. Their central concern of financial management is considered to be a rational matching of funds to their uses so to maximize the wealth of current shareholders.

Financial management is service activity, which is associated with providing quantitative information, of financial nature and that which may be needed for making economic decision regarding the choice among alternative course of actions.Thus financial management process of identification, accumulation, analysis, preparation, interpretation and communication of financial and control a business firm.

DEFINITIONS:-

“Financial management is an area of financial decision –making harmonizing individual motives and enterprise goals”

Weston and Brigham“Financial management is the application of the planning and control functions to the finance functions”

Howard and Upon.

FINANCIAL DECISION IN A FIRM

CAPITAL BUDGETING DECISIONS

The first and perhaps the most important decisions that any firm has to make is to define the business or businesses that is wants to be this decision has a significant bearing on how capital is allocated in the firm.

CAPITAL STRUCTURE DECISIONS

Once a firm has decided on the investment projects it wants to undertake, it has to figure out ways and means of financing them. The key issues in capital structure decisions are: what is the optimal debt-equity ration of the firm? Which specific instruments of equity and debt finance should the firm employ? Which capital markets should the firm access?

DIVIDEND DECISIONS

Determining the dividend policy is an important task. The dividend decision involves what percentage of profit to be paid of the shareholder. A number of factors affect the dividend decision such as market price of the share earnings, tax positions etc.

WORKING CAPITAL MANAGEMENT

Working capital management, also referred to as short-term financial management, refers to the day-to-day financial activities that deal with current assets (inventories, debtors, short-term holdings of securities, and cash) and current liabilities (short-term debt, trade creditors, accruals and provisions).The key issues in working capital management are: What is the optimal level of inventory for the operations of the firm?How much cash should the firm carry on hand? Etc A business proposal regardless of whether it is a new investment or acquisition of another company or restructuring initiative-raises the value of the firm only if the present value of the future stream of net cash benefit expected from the proposal is greater than the initial cash outlay required to implement the proposal.

RISK-RETURN TRADEOFF

The alternative course of action typically has different risk-return implications. A large plant may have a higher expected return and a higher risk exposure, where a small plant has may have a lower expected return and a lower risk exposure. A higher debt-equity ratio, compared to a lower debt-equity ratio, May reduced the cost of capital but expose the firm to greater risk.

LONG TERM SOURCES OF FINANCE

It is natural phenomenon that the firm is always in deficit of funds. There are two methods of rising of funds.

1) LONG TERM SOURCES2) SHORT TERM SOURCES

Capital budgeting decisions involve long-term funds. The different long-term sources of finance generally followed by companies are.

EQUITY CAPITAL:-

Equity capital represents ownership capital, as equity shareholders collectively own the company. They enjoy the rewards and bear the risk of ownership. However, their liability of the owner in a proprietary firm and the partners in a partnership concern is limited to their capital contributions.

INTERNAL ACCRUALS:- The internal accruals of a firm consist of depreciation charges and retained earnings. Depreciation represents the allocation of capital expenditure to various periods over which the capital expenditure is expected to benefit the firm. Retained earnings are that portion of equity earnings, which are ploughed back to the firm. Because retained earnings are the sacrifice made by the equity shareholders, they are referred to as internal equity.

PREFERENCE CAPITAL:-

It represents a hybrid form of financing as it has many features of both ordinary shares and debenture. Preference share may be issued with or without maturity date. The holder of preference shares get divided at a fixed rate and have preference over ordinary shareholders.

DEBENTURES:-

For large publicity traded firms, debentures are viable alternative to term loans. Akin to promissory notes, debentures are instruments for raising long-term debt. Debentures holders are the creditors of the company. The obligation of the company towards its debenture holder is similar to that of borrower who promises to pay interest and principal at specified times.

TERM LOANS:-

Term loans for more than a year maturity. It is generally available for a period of 10 years. Interest on term loans is tax deductible. They are obtained from banks and specially created financial institutions like IFCI, ICICI and IDBI etc the purpose of term lands is mostly to finance the company’s capital expenditure. They are generally obtained of financing large expansion, modernization or diversification projects. Hence this method of financing is also called project financing. This is the most widely used source of financing.

CAPITAL BUDGETING

Business firms have scarce resources that must be allocated among competitive uses. The financial management provides a framework for firms to take these decisions widely.

The investments decision includes not only those that create revenues and profits but also those that reduce cost. So, the investments decisions and the decisions relating to assets composition of the firm. A capital expenditure, from the accounting point of view, is an expenditure that is shown as an asset on the balance sheet. This asset, expect in the case of a one-depreciable asset like land , is depreciated over its life in accounting the classification of an expenditure as capital or revenue expenditure is governed by a certain conventions, by some provisions of law, and by the management’s desire to enhance and depress reported profits. Often, outlays on R&D, major advertising campaign, and reconditioning of plant and machinery may be treated as revenue expenditure for accounting purposes, been though they are expected to generate a stream of benefits in future and therefore, quality or being capital expenditure.

CAPITAL BUDGETING HAVE THREE DISTINCTIVE FEATURES:-

1. They have long-term consequences2. They often involve substantial outlay.3. They may be difficult or expensive.

FEATURES:-

It involves exchange of current funds for the benefits to be achieved in future. Future benefits are expected to be realized over a series of years. There is relatively high degree of risk. They are invariable decisions. They have long-term and significant effect on profitability of the concern.

They generally involve huge funds.

IMPORTANCE

Capital budgeting is of a paramount importance in financial decision-making. Capital budgeting decision affects the profitability of the firm. They also have a bearing on the competitive position of the enterprise. Capital budgeting decisions determine the future destiny of the company.

An opportunity investment decision can yield spectacular returns where as an ill-advised and incorrect investment decision can endanger the very survival even of the large sized firms.

A capital expenditure decisions has its effect over a long-term time span and inevitably affects the company’s future cost structure.

Capital investment decisions are not easily reversible, without much financial loss to the firm. Capital investment involves cost and the majority of the firms have scares capital resources Capital investment decisions are of national importance because of it determines employment,

economic activities and economic growth.

This underlines the need for thoughtful, wise and correct investment decisions.

NEED FOR CAPITAL BUDGETING:-

Capital budgeting decisions are vital to an organization as they include the decisions as to. Whether or not funds should be invested in long-term projects such as setting of an industry,

purchase of plant and machinery etc. To analyse the proposal for expansion or creating additional capacities.

To decide the replacement of permanent asset such as building and equipments. To make financial analysis of various proposals regarding capital investment so as to choose the best

out of many alternative proposals.

DIFFICULTIES:

Capital budgeting are not easy to take there are no of factors responsible for this The benefits from investments are received in some future period. The future is uncertain.

Therefore, an element of risk is involved. A failure to forecast correctly will lead to serious errors, which can be corrected lonely at a considerable expenses

Problems are also arising because cost incurred and benefits received from capital Budgeting decisions occur at different time period. They are not logically comparable because of the

time value of money. It is not often possible to calculate in strictly quantitative term, all the benefits of the cost relating to

a particular investment decision.

RATIONALE:-

The rationale underlying the capital budgeting decisions is efficiently. Thus a firm must replace wrong and obsolete plant and machinery, acquire fixed assets for current or new products and make straight

investment decisions. This will enable the firm to achieve the objectives of maximizing the profits. The quality of these decisions is improved by capital budgeting.

Capital budgeting decisions can be of two types:

1) Those which expand revenues

2) Those which reduces costs

INVESTMENT DECISIONS EFFECTING REVENUE:

Investment decisions are expected to bring in additional revenue there by raising the size of firms total revenue. They can be the result of either expansion of present operations of the development of new product line these decisions involved acquisition of new fixed assets.

INVESTMENT DECISIONS REDUCCUIND COST:-

These decisions add the total revenue of the firm. These investment decisions are subject to less uncertainty. This is because the firm has a better “feel” for potential cost saving as it can examine past production and cost data.

THERE ARE THREE TYPES OF CAPITAL BUDGETING DECISIONS:

1) Accept-reject decisions:

This is a fundamental decision capital budgeting. If the project is accepted, - the firm invests in it. If the proposal is rejected, the firm does not invest in it so, by applying this criterion, all independent projects are accepted. Independent projects are projects that do not compete with one another in such a way the acceptance a project preclude the possibility of acceptance of another.

2) Mutually exclusive projects decision:

These are projects, which, compete with other projects in such a way that the acceptance of one will exclude the acceptance of other projects. The alternatives are mutually exclusive and only one may be chosen. Mutually exclusive investment decisions acquired significance when more than one proposal is acceptable under accept-reject criterion.

3) Capital rationing decisions:

Capital rationing refers to situation in which the firm has more acceptable investments requiring greater amount of finance then is available with the firm. It is concerned with selection of group of investment proposals actable under accept-reject criterion under financial constraints.

EVALUATION OF INVESTMENT PROPOSLS:

At each point of time a business firm has a number of proposals regarding various number of projects in which it can invest funds. But funds available with the firms are always limited and it’s not possible to invest in all the proposal at a time In selecting the criterion, the following two fundamental principles must be kept into view.

The bigger, the better principles: the principle means that other things being equal bigger benefits are preferable to small ones.

The bird in hand principles: this principle means that other things being equal, early benefits as other things are seldom equal.

Bother the above principles have to be applied to take the right decision

TECHNIQUES OF CAPITAL BUDGETING The methods of appraising capital expenditure proposals can be classified in to two broad categories:

1. Traditional or un discounted cash flow techniques2. Discounted or time adjusted cash flow techniques

DISCOUNTED CASH FLOW METHODS

The distinguishing characteristics of discounted cash flow capital budgeting techniques are that they taking in to consideration the time value of money while evaluating the cost and benefits of the project. They also take into consideration the benefits and cost occurring during an entire life of the project.

NET PRESENT VALUE METHOD (NPV)

NPV may be defined as the summation of the present values of the cash proceeds in each year minus the summation of the present values of the net cash outflows in each year. The net present value (NPV) of a project is the sum of the present values of all the cash-flows positive as well as negative that are expected to occur over the life of the projects.

The generally formula of NPV is:- n NPV of project = -------- Initial investment Ct

T=1(1+rt)t

Where Ct = Cash flow at the end of year t RT = Discounted rate for year t

The steps to be followed for adopting the NPV methods:1) Determine an appropriate rate of the interest that should be selected as a minimum required rate of

return. This rate should be the minimum rate of return below which the investor considers that does pay him the invested amount.

2) Compute the present value of total investment outlay; if the total investment is to be made in the initial year, the present value shall be the same the cost of investment.

3) Compute the present value of total investment proceeds i.e. cash inflows at the above determined discounted rate

4) Calculate the NPV of each project by subtracting the present value of cash out flow for each project.

The present value of rupee 1 due in any number of years can be found by using the following formula. 1 PV = ----- (1+r)t

Where PV = Present value r = rate of interest t = number of years

ACCEPT OR REJECT CRITERION:

If NPV >ZERO, ACCEPTIf NPV< ZERO, REJECT

In case of mutually, exclusive projects, the various proposals would be ranked in order to descending order. The proposal with higher NPV is to be accepted.

MERITS:-

1) It recognizes the time value of money.

2) It is sound method of appraisal as it considers the total benefits arising out of the proposal over its lifetime.

3) Changing discount rate can be built in to the NPV calculation by altering the denominators. This rate normally changes because longer the time span, lower the value of money and higher, the discount rate

4) This method is very useful for selection of normally exclusive projects.

DEMERITS:

A. It is difficult to calculate to understand

B. The present value method involves the calculation of required rate of return to discount the cash flows, which present serious problems.

C. It is an absolute measure.

D. This method may not give satisfactory results in case of projects having different effective lives.

E.

INTERNAL RATE OF RETURN (IRR):

The internal rate of return (IRR) of a project is the discount rate, which makes its NPV equal to “0”.Put differently, it is the discount rate, which equates the present value of future cash flows with the initial investment. It is the value or r in the following equation:

Investment = n ------- ? T = Ct --------- 1(i+r)Where,Ct = Cash flow at the end of the yearr = internal rate of return (IRR)t = life of the projectApplying following stapes can calculate IRR

Step 1

Calculate cash flow after tax

Step 2

Calculation fake payback period

Fake PBP = Initial investment ------------------------ Average cash flow

Step 3

Look for the factor in the present value annuity table in the year column until you arrive at figure until you closest to the fake PBP

Step 4

Note the corresponding percentage.

Step 5

Calculate NPV at that percentage

Step 6

If NPV is positive take a rage higher and if NPV is negative take regret lower and once again calculate NPV

Step 7

Continue Step5 until we arrive at low rates one giving positive NPV and another giving negative NPV.

STEPS

Actual IRR can be calculated by using the following formula:

LR + P.V of cash inflows at LR-P.V cash outflows IRR = --------------------------------------------------------------------------------- (HR-LR) P.V of cash inflows at LR-P.V of cash inflows at HR.

Where,R = interest rate,LR = lower rateHR = Higher rate

ACCEPT OR REJECTION CRITERION:-

ACCEPT: If the IRR is greater than the cost of capital. REJECT: If the IRR is less than the cost of capital.

MERITS:

1) It recognizes the time value of money.

2) It considers all cash flows occurring over the entire life of the projects to calculate its return.

3) It is consistent with the shareholders wealth maximization objective.

DEMERITS:

1) It gives misleading and inconsistent results when the NPV of a project does not decline with discount rates.

2) It also fails to indicate a correct choice between mutually exclusive projects under certain situations.

PROFITABILITY INDEX METHOD (PI)

It is ratio of the present value of the cash inflows at the required rate of return to the initial cash outflow of the investment. Using the profitability index PI or benefits cost ratio (BCR) a project will qualify often acceptance if its PI exceeds one. The NPV will be positive greater than one and will negative when the PI is less than one. Thus, NPV& PI approaches give the same results regarding the investment proposal. The selection of project with the PI method can also be done on the basis of ranging. PI depends upon cash inflows before depreciation and after tax. It makes into consideration the scrap value. The formula to calculate PI or BCR is as follows:

Total present value of cash inflows PI = ------------------------------------------------ Total present value of cash outflows

MERITS:

1) It gives due consideration to the time value of money.

2) Since the present value of cash inflows is divided by initial cash outflows it is a relative measure of the projects profitability.

DEMERITS:

1) It is difficult to understand

2) It involves more computation than traditional methods.

TRADITIONAL OR NON-DISCOUNTED TECHNIQUES:

1. PAY BACK PERIOD METHOD (PBP):

Pay back measures the number of years required by the cash flows after tax to pay back the original outlay required in an investment proposal. It depends upon cash inflows before depreciation and after tax. Payback period does not consider the scrap value. There are two ways of calculating the PBP.

The first method can be applied when the cash inflows are uniform. Original investment PBP = ------------------------------------------ Constant Annual Cash Inflows

The annual cash flow represents the earnings i.e. estimated cash savings resulting from the proposed investment.If the calculated PBP is less than the standard, project is accepted and vice versa

The second method is used when projects cash flows are not equal and vary from year to year. Payback period is calculated.

2. DISCOUNTED PAY BACK METHOD:

This is developed due to the limitation of the PBP method that it ignores time value of money. Hence, an improvement is made where the present values of all inflows are cumulated in order of time. The time at which the cumulated present value of cash inflows equals the present value of cash outflows is known as discounted PBP. The project, which gives a shorter discounted payback period, is accepted.

REASONS FOR POPUIARITY OF PEP:

Despite its serious short comings the PBP is widely used in appraising investments. The PBP May be regarded roughly as the reciprocal for the IRR when the annual cash inflow is

constant and the life of the project fairly long.

The PBP is somewhat akin to the breakeven point. A rule of thumb, it serves as a useful shortcut in the process of informational of generation and evaluation

The PBP conveys information about the rate at which the uncertainty associated with a project is resolved. The shorter the PBP the faster the uncertainty associated with the project is resolved and vice versa.

ACCEPT OR REJECT CRITERION:

The payback period method can be used as a decision criterion to accept or reject investment proposals. If a single investment is being considered, if the annual pay back period is less than the predetermined payback period the project will be accepted, if not it would be rejected.

When the mutually exclusive projects consideration they may be ranked according to the length of the payback period. The project with shortest pay back may be assigned

MERITS:

1) It is the best method incase o evaluation of single project.

2) It is to calculate and simple to understand.

3) It is bases on the cash flow analysis.

DEMERITS:

1) It completely ignores all cash flows after the payback period.

2) It completely ignores time value of money.

In case the cash flow are unequal the payback period can be found by adding up the cash flows until the total is equal to the initial cash outlay of the project.

3. ACCOUNTING RATE OF RETURN (ARR):

Average rate or return is also known as accounting rate or return method. It is based on accounting information rather than cash flows. ARR is a technique that helps us in knowing the particular project, from which decision can be made to accept or reject the investment proposal. According to ARR as an accept / reject criterion, the actual ARR would compared with the predetermined or a minimum required rate of return or cut off rate. A project can be accepted if the actual ARR is higher than the minimum desired ARR, otherwise it is liable to reject ARR depends upon profit after depreciation and tax (PAT), ARR neglects the scrap value. The time value of money is not taken into consideration.

Average annual profit after tax ARR = ------------------------------------------------- *100 Average investment Average Investment = Net Additional working capital + Salvage value +

1/2(Original Investment-Salvage value).

Total cash flow after tax Average Annual profit after tax = -------------------------------------------- Life of the project

ACCEPT OR REJECT CRITERION:

The actual average rate or return is compared with pre-determined or minimum required rate of return or cut off rate. A project would qualify to be accepted, if the actual rate of return is higher than the minimum desired average of return.It more than one alternative proposal are under consideration, the average rate of return may be arranged in descending order of magnitude starting with the proposal with the highest average rate of return. MERITS:

1) It is simple to understand and easy to calculate,

2) The entire stream of incomes is used to calculate the average rate of return.

MERGER AS A CAPITAL BUDGET:

Under this method the merger decision should be considered as project investment decision, the NPV mergers should be determined by comparing the present values of the acquisition firm after merger.NPV = (PV of merger firm X holding value of acquiring firms) - (PV of acquiring firm),

RISK AND UNCERTAINITY IN CAPITAL BUDGETING:-

All the techniques of capital budgeting requires the estimation of future cash inflow and cash outflows. The cash flows are estimated abased on the following factors.

Expected economic life of the project.

Salvage value of the asset at the end of the economic life.

Capacity of the product.

Selling price of the product.

Production cost.

Depreciation.

Rate of Taxation

Future demand of the product, etc.

But due to uncertainties about the future the estimates of demand, production, sales costs, selling price, etc cannot be exact, for example a product may become obsolete much earlier than anticipated due to un expected technological developments all these elements of uncertainties have to be take into account in the form of forcible risk while making an investment decision. But some allowances for the element of risk have to be proved.

FACTORS INFLUENCING CAPITAL EXPENDITURE DESCISIONS:

There are many factors financial as well as non financial which influence the capital expenditure decisions and the profitability of the proposal yet, there are many other factors which have to be taken into consideration while taking a capital expenditure decisions. They are

1) URGENCY:

Sometime an investment is to be made due to urgency for the I survival of the firm or to avoid heavy losses. In such circumstances, proper evaluation cannot made though profitability tests. Examples of each urgency are breakdown of some plant and machinery fire accidents etc.

2) DEGREE OF UNCERTAINTY:

Profitability is directly related to risk, higher the profits, greater is the risk or uncertainty.

3) INTANGIBLE FACTORS:

Sometimes, a capital expenditure has to be made due to certain emotional and intangible factors such as safety and welfare of the workers, prestigious projects, social welfare, goodwill of the firm etc.

4) AVAILABILITY OF FUNDS:

As the capital expenditure generally requires the previsions of laws solely influence by this factor and although the project may not be profitable. Yet the investment has to be made.

5) FUTURE EARNINGS:

A project may not be profitable as competed to another today, but it may be profited to increase future earnings.

Sometimes project with some lower profitability may be selected due to constant flow of income as compared to another project with an irregular and uncertain inflow of income.

CAPITAL EXPENDITURE CONTROL:

Capital expenditure involves no-flexible long-term commitments of funds. The success of an enterprise in the long run depends up on the effectiveness with which the management makes capital expenditure decision. Capital expenditure decisions are very important as their impact is more or less permanent on the well being and economic health of the enterprise. Because of this large scale mechanization and automation and importance of capital expenditure for increase in the profitability of a concern. It has become essential to maintain an effective system of capital expenditure control.

OBJECTIVES CONTROL OF CAPITAL EXPENDITURE:

To make an estimate of capital expenditure and to see that the total cash outlay is within the financial resources of the enterprise

To ensure timely cash inflows for the projects so that no availability of cash may not be problem in the implementation of the problem.

To ensure that all capital expenditure is properly sanctioned.

To properly coordinates the projects of various departments

To fix priorities among various projects and ensure their follow-up.

To compare periodically actual expenditure with the budgeted ones so as to avoid any excess expenditure.

To measure the performance of the project.

To ensure that sufficient amount of capital expenditure is incurred to keep pace with rapid technological development.

To prevent over expansion.

STEPS INVOLVED IN CONTROL OF CAPITAL EXPENDITURE:

Preparation of capital expenditure budget.

Proper authorization of capital expenditure.

Recording and control of expenditure.

Evaluation of performance.

LEASE FINANCING:-

Lease finance is an agreement for the use of an asset for a specified rental. The owner of the asset is called the lesser and the user the lesser

1) Operating leases

2) Financial leases

Operating leases are short-term no-cancel able leases where the risk of obsolescence in borne by the lesserFinancial leases are long-term non-cancelable leases where any risk in the use of asset is borne by the lessee and he enjoys the return too.

Preliminary budget estimates for the year following the budget year.

GENERAL GUIDELINES:-

The capital funds budget is to be prepared under six major heads.1) Continuing schemes

2) New schemes

3) Modernization and rationalization

4) Township

5) Science and technology

6) EDP schemes

SCIENCE AND TECHNOLOGY

CONTINUING SCHEMES:-

These schemes include all such schemes which are under implementation of which funds prevision has been made in the current year /prevision is required in the budget year.

NEW SCHEMES:-

This scheme includes all such schemes, which are proposed to be initiated in the budget year and for which under provisions is required in the budget year. Normally, such schemes are included in the five-year plan of the company approved by the planning commission.

MODERNIZATION AND RATIONALIZATION (M&R):-

This includes item of plant and machinery etc for which funds required in the budget year and the following year. All item included in M&R should result in cost reduction/quality improvement/rebottle necking/replacement/productivity, improvement and welfare. The M&R items are to be submitted in the following main characteristics accompanied with full justification on the agenda of facilities increased output and production, quality requirements bottlenecks.Replacement/modernization.Balancing facilities (essentially to increase production).Operational requirements including material handlingQuality/testing facilities.WelfareMinor works.These requirements should be protested term wise. A separate proposal is required for M&R items costing more than Rs 10, 00,000.

TOWNSHIP:- Township budget is divided into two parts.

Continuing township schemes

New townships schemes.

Funds required under each schemes should be backed up with full data on number on quarter/scope of work to be completed against the funds requirements phasing of budgeted funds for current year, budget year and following year etc, should be given similar information on number of quarter/scope of work already completed, expenditure incurred till last year, satisfaction level it is to be added in the above back up information for each scheme.

SCIENCE AND TECHNOLOGY:- This budget can be divided into two categories

Continuing schemes.

New schemes to be taken up in the budget year.

The schemes should fall in any of the above cartages giving details on physical and financial progress etc.

EDP SCHEMES:- All funds requirements for computer are information system should be grouped under EDP schemes and projects accordingly.

BUYING OR PROCURING:Buying or procurement involves purchasing an asset permanently in the form of cash or credit.

LEASING VS BUYING:Leasing equipment has the tax advantage of depreciation, which can mutually benefit the lesser and lessee, other advantage of leasing, include convenience and flexibility as well as specialized services to the lessee. Lease privies handy to those linens, which cannot obtain loan capital form normal sources.

The pros and cons of leasing and buying are to be examined thoroughly before deciding the method of procurement i.e. leasing or buying.

CAPTER – 3

CAPITAL BUDGETING IN BHEL

INTRODUCTION OF CAPITAL BUDGETING IN B.H.E.L.

The capital budgeting in BHEL is based manual, which covers the following aspects.

1) CAPITAL FUNDS BUDGET:-

Five year plans

Annual plan exercise.

2) FEASIBILITY REPORT/DETAILED PROJECT REPORT:-

Submission and approval procedure/financial limits. Guidelines for preparation of feasibility reports. Extremely funded schemes.

3) PROGRESS REPORTING AND MONITORING

4) REPLACEMENT GUIDELINES

5) GOVERNMENT GUIDELINES

DEFINITIONS:-

CAPITAL EXPENDITURE:-

All expenditure exceeding Rs. 10,000 which results in the acquisition of permanent assets is called capital expenditure. These assets are intended to be continuously used the business for the purpose or earning revenue directly or indirectly.

FIVE-YEAR PLAN:-

Five–year plan of the company constitute the preliminary programmed of budgeted investment during the plan period of 5 years. These investments are planned against the categories Viz schemes under implementation of new schemes to be taken up science and technology, modernization and rationalization and welfare faculties.

ANNUAL PLAN:-

The annual plan comprises yearly capital investment funds budget of the company to be submitted to the government for approval. The allocated funds by the government are utilized in the planned manner against at the investment schemes modernization and rationalization, township, science and technology.

CAPITAL FUNDS BUDGET:-

Capital funds budget is what enable a programme of action on all capital expenditure item to be grouped in one consolidated document. This outlines the proposal for creation of new assets additions for increase in production; diversification r reduction of coast ensures how these ventures will be financed over a given period. Included five year plan, annual plan exercise and no-plan budget exercised, which are described blow.

FIVE-YEAR PLAN:-

The government has been formulating five-year plans for the economic growth of the country. In line with this policy, BHEL also formulates the five-year plans of the company and submits to the government for inclusion in every five-year plan of the country.

Five-year plans exercise normally starts from the third year of the previous five-year plan. These schemes included in the five-year plan approved by planning commission are prioritized for implementation depending on the need/resources etc, these schemes should be in line with perspective plan of the company.

FINDING:-

Plan funds are provide by the planning commission for each scheme based the progress, funds availability etc, the five-year plan funds are then distributed and released as per the annual plans of the undertakings.

ANNUAL PLAN EXERCISE:-

The capital funds budget/annual plan is meant for making provision for cash expenditure of capital nature including the foreign exchange component however necessary.

The capital funds budget will mainly contain the following information along with other information.

1) Revised estimates for the current year.

2) Budget estimated for the ensuring year i.e. budget year

FUNDING MODE:-

As per present practice, the annual plan/capital funds budget of the company is financed under two major heads

Budgetary supports from the government.

Internal resources of the company.

1) The budgetary support from the government is received in the form of loan and equity the ratio of 1:1 approximately as per the government guidelines.

2) Internal resources are the company’s own funds/reserves. The present trend indicates gradual decline budgetary support from the government and it is insisting on utilizing of more internal resources for capital funding. This necessitates a rigorous and critical budget formulation exercise.

BUDGET SUBMISSION

The complete consolidated capital funds budget as per the prescribed formats/information required giving revised budget for current year, funds budget for ensuring year (i.e. budget year) preliminary budget for the year following the budget year should reach corporate office be 10th August every year. The division will be communicated about the board approval/provisional government indications by December/January every year.

The flow chart for the annual followed in BHEL any be indicated by the following flow diagram.

NON-PLAN BUDGET EXERCISE:-

All expenditure on capital equipment like cranes, materials handling equipment, special tools and plants equipment, which are required at project sits for erection and commissioning purpose etc, should be considered as non-plan expenditure.

It is classified under 3 categories.T&P which could be used for more than one project.T&P unlikely to be available for more than one project.T&P supplied subcontractor.

FEASIBILITY REPORT:-

Guidelines for preparation of feasibility report.For investments a detailed feasibility report is required to be formulated for approval of the competent

authority. The feasibility report must spell out in detail the following, Objectives of the scheme/project.

Consistency with the company plans/policies.

Inputs required and their phasing.

Financial economic analysis.

Implementation plan.

Expansions programmed in future if any.

In BHEL the capital investment proposal can be classified broadly as Schemes for expansion of plan capacity diversification etc.

Modernization and rationalization, including replacement schemes

Township

Science and technology

SCHEMES/PROJECTS:-

Feasibility report for such schemes should include an analysis for the plant initiating the report. Its present status, its products and this role in the industry. Government view on the present future growth plants for true industry to which the products belong and current five year plan provisions for the scheme should also be brought out.

NEED FOR THE PROJECT:-

A brief paragraph on alternatives examined/results obtained should be included in the report. This should done taking into consideration factors like optimum size of the plant, location, product

mix, technology, emend, transportation etc.

TECHNOLOGY CONSIDERATION/CHOICE:-

For the products to which the scheme related all consideration/Para parameters analyzed us in making the choice should be outlined. These may enumerate as follows.

Suitability of technology for the product/raw material available

Status of technology within BHEL

Whether exiting/new technology, if new reasons for preference and benefits.

Trends in worked local markets.

Competitiveness of the technology chosen.

Collaboration proposed

R&D activities required.

Changes of technology chosen getting obsolete.

PROJECT DESCRIPTION;-

In order to help the appraisal in analyzing evaluating the proposal, the description should touch upon site, equipment requirements, input requirements, labors phasing of construction, production built up, and any collaboration required, housing needs etc.

MARKETING:-

The detailed market analysis in the feasibility report should answer questions like,Total market potential for the product.

Expected market share. Competitor’s details.

Based on the market survey the demand supply position I details should be given.Marketing plan for the product based on market survey and studies conducted for the product should

be mentioned in the report.

CAPITAL INVESTMENT REQUIREMENTS:-

It is necessary that the estimates of capital costs presented in the feasibility report should be reasonable complete and properly estimated. For the purpose of the project appraisal, capital costs are essentially those costs, which are incurred before the commencement of commercial production. For fixed assets costs like customs duty, excise insurance, transportation at the latest applicable rate should be calculated.

OPERATING REQUIREMENTS:-

For the purpose of project appraisal, operation costs are essentially those costs, which are incurred after the commencement of commercial production. This will help in financial analysis.FINANCIAL ANALYSIS:-

The purpose of financial analysis of a project is to presents some measures to assess the financial viability of the project. The data presented in this format should be consistent with the production plans, operation costs, and capital costs.

SENSITIVITY ANALYSIS

The feasibility report should also briefly indicate present the results of sensitivity analysis. This is relevant whenever the key assumptions made in the feasibility report are likely to be changed/affected.

PROJECT IMPLEMENTATION PLAN:-

The feasibility report should briefly indicate the project implementation, organization that will be responsible for executing the scheme. This is most essential for expansion/diversification schemes at existing plant locations.ECONOMIC ANALYSIS:-

Economic analysis the visibility of the project is evaluated taking in, to the account the opportunity cost of the tradable inputs/outputs, which go in to the project, shadow prices for foreign exchange, domestic resources costs to the non-tradable inputs. Such analysis may be relevant for planning commission in evaluating the projects form the national perspective/plans.

PREPERATION OF DETAILED PROJECT:-

For all capital investment schemes, which have been approved by the government, it is essential to prepare a detailed project report, which will form the basis of project execution. The purpose of detailed project report is not only to enable projecting a realistic requirement of budgetary funds, but it would also improve the planning the implementation aspects of capital projects. The detailed projects reports should be submitted within six months from the date of financial sanction for the scheme.

MODERNISATION AND RATIONALISATION

Plant modernization and rationalization, which is in operation for sometime is very important. The facts about the wear and tear of the equipment, change in technological process quality improvement cannot be denied. All this needs a marginal investment in the existing plants/units. This may also be very essential to meet the production targets customer satisfaction proposals can be classified to fall under the following categories:

1. Technological up gradation

2. Cost reduction efficiency improvement.

3. Replacements

4. Production diversification.

In most of the cases, if the equipment procured is of very high values the exceeding Rs.20 lacks it is necessary to treat the same as a scheme and to justify the proposal on the basis of financial analysis wherever possible.

In some of the cases involving quality involvement etc. Where it may be difficult to quantify benefits for the purpose of financial viability, stress should be laid on selecting the optimums cost option. In regard to cost reduction efficiency improvement proposal, the recommendation of technological industrial engineering departments supported by financial analysis can be furnished.

TOWNSHIP SCHEMES

The investment made on civil scheme is also capital investments and any such investment has to be supported by proper justification as per guidelines of the government. The most common types of township schemes are:

Residential quarters for employees Shopping centers Schools Hospitals Community halls Parks etc.

SCIENCE AND TECHNOLOGY

The capital investment under science and technology for R&D purpose should be considered under the following heads.

R&D items/schemes envisaged for commercialization in a specified time span R&D schemes for product development. R&D schemes dealing with new products. R&D schemes dealing with new products. Computer schemes

EXTERNALLY FUNDED SCHEMES

Schemes can be taken up with foreign assistance from UPDA World Bank KFW other agencies.The feasibility report prepared by the company has to be first approved but the BHEL board of

directors and government before it is considered for external funds. The board of directors and government before it is considered for external funds. The departments involved in approving process are Department of heavy industry, planning commission, department of economic affairs in ministry of finance.

Company plans/objectiveGovernment policy/five year plansExamination of various alternatives and results.

BASIC STRUCTURE/LAYOUT OF TYPICAL FEASIBILITY REPORT:

1. NEED FOR THE PROJECT Company plans/objectives

Government policy/five year plans

Industry details

Examination of various alternatives and results

2. TECHNOLOGY CONSIDERATION AND CHOICE

3. PROJECT DESCRIPTION

Site selection/availability of existing infrastructure

Environmental consideration

Housing

Plant & machinery equipment description

Constructions description and materials

Manpower

Transportation

Planning of construction

Production/priceless technology

Input requirements

4. MARKETING DEMAND SUPPLY ANALYSIS

Industry data

Demand/supply position

Choice and product mix

Selling price

Export potential marketing organization

5. CAPITAL INVESTMENT REQUIREMENT

Capital cost for plant and machinery, civil works building

Basis for estimation

Other items of capital cost/interest during construction

Incidental expenses during constructions

Working capital requirements

6. OPERATING REQUIREMENTS

Operating cost and its basis

Inventory

Production built up

7. FINANCIAL AGENCIES

Assumptions made regarding depreciation, income tax, investment allowances,

Profit and loss statement

Return on investment at various plant capacities,

Discount cash flow analysis

Financial statement

Break even analysis

8. PROJECT IMPLEMENTATION

Schedule of the activities of the project

Project organization

Availability of scare construction inputs

Infra structure

9. SENSITIVITY ANALYSIS

With respects to demand forecast

With respect to capital costs

With respect to input price

With respects to any other critical element.

10. ECONOMIC ANALYSES

Foreign exchange savings

Development of labour skills/employment generated

Ancillary development

Export

Time cycle reduction

PROGRESS REPORTING/MONITORING

NEED: -

Once the capital budget has been approved, it has to be ensured that targets laid down regarding physical progress adhered to. Any shortfall in this regard is likely to delay the completion of project and ultimately affects production program me. Therefore, each project is continuously monitored at division level both physical and financial.For major projects costing more than 5 crores, project review committees are required to be constituted having representatives from project unit and corporate office. These committees should meet periodically to review the progress and recommend taking corrective actions.

REPORTING PROCEDURE:

At the beginning of each financial year mid April each division should a detailed month wise cash outflow plan for each scheme linked with the major physical activities of that scheme. Complete progress of the scheme for the budget year should be reported on this plant.

1. MONTHLY REPORTING:

The capital expenditure progress should be reported to corporate office in this first week of the every month with effect from April

2. QUARTER REPORTING:

Apart from above, quarterly report should be submitted to corporate for the purpose of information to be sent to government/directors and CMD on the progress status every quarter.

3. COMPLETION REPORT:

In case of completed projects, a completion report should be submitted one year after the start of commercial production

REPLACEMENT GUIDELINES:

Substantial investments have been made in the plant and machinery in all the BHEL manufacturing division. Through modernization and expansion programmers, new machine tool has been added from time to time. New projects are underway increasing investment in plant and machinery still to higher level. Capital expenditure will be considered to have been accrued on replacement of an item equipment is declared to be unfit to perform the desired functions and similar technologically better piece of equipments is purchased in its place to continue the specific work.Replacement of plant and machinery may be warranted for the following reasons:

1. Due to natural wear and tear

2. Technological obsolescence

3. Change in service requirements

4. Accident

PROCEDURE FOR REPLACEMENT

Each unit will have replacement committee, the replacement committee should comprise representatives from manufacturing technology, maintenance and services, factors engineering, finance industrial engineering management services and central planning divisions. They are representatives from the maintenance and services department will be the convener does not change often. The committee may formulate a written guideline indicating factors, which are to being taken on to account while carrying out technical appraisal. Once the need for replacement is established and various alternatives suggested, the proposal would be submitted to replacement committee for taking the decisions.

DISPOSAL OF EXISTING MACHINE

Replacement committee will also decide the manager in which the existing machine tool, outside party, it will pre-empt the possibility of assigning the existing machine to alternative views with in the division or sister divisions. Having taken the decision on the disposal, responsibility may be fixed on suitable agencies within the division.

GOVERNMENT GUIDELINES/POLICIES

Reference has been made in the manual to various governments’ publications containing guidelines/policies which are relevant/useful for the capital budgeting exercise within the BHEL and with the other government departments.

PROCEDURE OF CAPITAL BUDGETING IN BHEL

The following budgeting procedure in BHEL is done in four phases which can be explained as follows:

FIRST PHASEThis phase involves the different aspects involved in approval put forth by the department concerned. The different steps involved are:-

1. A letter of requisition with the proposal is sent to the department concerned to the R&D department. This letter contains the specifications of the item and in the case of replacement the need for the replacement is to be clearly specified along with the estimate

2. This proposal is sent from R&D department to finance, industrial engineering and maintenance and services departments for their consent.

3. Finance department looks into the financial aspects of the proposal.

4. Industrial engineering department checks whether the specifications are apt for the proposal.

5. Maintenance and service department.

SECOND PHASE

This phase involves the following steps:1. The departments which has sent the proposal, gives 100% specifications to the purchase

department.

2. The purchase department list outs the suppliers and quotations are invited.

3. After the quotations are received, the proposal with least cost is opted for, also keeping in view the quality of the item.

4. The item is then ordered.

5. The stores department receives the item ordered for.

6. The stores department unpacks the item and physical effects if any are checked.

7. If the item is satisfactory, it is installed in the right place.

THIRD PHASEThis phase involves the following steps:

1. A representative of the supplier gives demonstration with respect to the technical aspect and usage of the item.

2. The item is then put to use.

3. From time to time, steps are taken for proper maintenance.

4.

FOURTH PHASEIf the machines become worn out or obsolete, it is disposed off for replacement.The price is described above its continuous cycle. It can be represented diagrammatically as follows:

APPROVAL

DISPOSAL PROCUREMENT PUT IN USE

CHAPTER – 4

DATA ANALYSIS & CONCLUSION

Projects evaluated Project 1 project 2 project 3 project 4 project 5

Cost of investment 5125 10250 4125 8125 1920

PBDT Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 Total

Project1 1020 1520 1520 1620 1720 1520 1650 1520 1210 1310 14610Project2 3060 4560 4560 4860 5160 4560 4950 4560 3630 3930 43830Project3 306 456 456 486 516 456 495 456 363 393 4383Project4 1122 1672 1672 1782 1892 1672 1815 1672 1331 1441 16071Project5 91.8 136.8 136.8 145.8 154.8 137 148.5 136.8 108.9 117.9 1314.9

*In Lakhs Depreciation as per the profit and loss account 15% SLM

Depreciation as per the income tax act 1st year 2nd year onward 35% 15%Wdv

Tax Rate 33%

Present value factor 13%

NPV, IRR, PI, ROI

Recommendations

Project 1

(Estimate budget RS 5125 Lacks)

Years PBDTLess

depreciation as per income tax

PBT Less Tax 33%

PAT ADD Depreciation

CFAT CCFAT

1 1020 1794 -774 -255 -519 1794 1276 12762 1520 500 1020 337 683 500 1183 24593 1520 425 1095 361 734 425 1159 36184 1620 361 1259 415 844 361 1205 48235 1720 307 1413 466 947 307 1254 60776 1520 261 1259 415 844 261 1105 71827 1650 222 1428 471 957 222 1179 83618 1520 188 1332 439 893 188 1081 94429 1210 160 1050 346 704 160 864 1030610 1310 136 1174 387 787 136 923 11229

Total 14610 4354 10256 3382 6874 4354 11229

Years CFAT CCFAT PV@13% Total PV PV@20% Total pv1 1276 1276 0.885 1129 0.833 10612 1183 2458 0.783 926 0.694 8213 1159 3618 0.693 803 0.579 6714 1205 4823 0.613 739 0.482 5815 1254 6077 0.543 681 0.402 5046 1105 7182 0.480 530 0.335 3707 1179 8361 0.425 501 0.279 3298 1081 9442 0.376 406 0.233 2529 864 10306 0.333 288 0.194 16810 923 11229 0.295 272 0.162 150

Total 6275 4907

Present value cash inflow = 6275Present value cash outflow=5125

PRESENT VALUE METHOD

Net present value = cash inflow-cash outflow

= 6275 - 5125

NPV @ 13% = 1150

PROFITABILITY INDEX

P.I = Total present value of cash inflow/ Total Investment

= 6275/5125

= 1.22 Times

INTERNAL RATE OF RETURN (IRR)

Inflows at lower rate-investmentIRR= Lower rate + ---------------------------------------- * (HR-LR) Inflows at lower rate-Inflow at higher rate

6275-5125 = 13 + ----------------------- *(20-13)

6275- 4097

1150 = 13 + -------------------*7

1368

= 13 + 5.88

=19%

PAY BACK PERIOD METHOD

Investment - CCFAT Based period + --------------------------------

Next CFAT

5125 – 4823

4 + ------------------ 1254

303 4+ -----------

1254

4 + 0.2 = 4.2 years

Return of Investment on cash inflow basis (or) book profit

Average cash inflowROI= ---------------------------- * 100 Average Investment

Average cash inflow=11229/10 = 1122.9

Average Investment = 5125/2 = 2563

=1123/2563 *100 = 43.8% (OR) 44%

Project 2

(Estimate budget RS 10250 Lacks)

Years PBDTLess

depreciation as per income

tax

PBT Less Tax 33%

PAT ADD Depreciatio

n

CFAT CCFAT

1 3060 3588 -528 -174 -354 3588 3234 32342 4560 999 3561 1175 2386 999 3385 66193 4560 849 3711 1224 2486 850 3336 99554 4860 722 4138 1366 2772 722 3494 134495 5160 614 4546 1501 3046 613 3659 171086 4560 522 4038 1333 2706 521 3227 203357 4950 443 4507 1487 3019 444 3463 237988 4560 377 4183 1380 2803 377 3180 269789 3630 320 3310 1092 2218 320 2538 2951610 3930 272 3658 1207 2451 272 2723 32239

Total 43830 8706 35124 11590 23534 8706 32239

Years CFAT CCFAT PV@13% Total PV PV@20% Total pv1 3234 3234 0.885 2862 0.833 26942 3385 6619 0.783 2651 0.694 23493 3336 9955 0.693 2311 0.579 19324 3494 13449 0.613 2143 0.482 16845 3659 17108 0.543 1986 0.401 14716 3227 20335 0.480 1550 0.335 10817 3463 23798 0.425 1472 0.279 9668 3180 26978 0.376 1196 0.232 7419 2538 29516 0.333 845 0.194 49210 2723 32239 0.295 802 0.162 441

Total 17818 13851

Present value cash inflow = 17818Present value cash outflow= 10250

PRESENT VALUE METHOD

Net present value= cash inflow-cash outflow

= 17818 - 10250

NPV @ 13% = 7268

PROFITABILITY INDEX

P.I = Total present value of cash inflow/ Total Investment

= 17818/10250

= 1.73 Times

INTERNAL RATE OF RETURN (IRR)

Inflows at lower rate-investmentIRR= Lower rate + ---------------------------------------- * (HR-LR) Inflows at lower rate-Inflow at higher rate

17818 - 10250 = 13 + ------------------ *(20-13)

17818 - 13851

7268 = 13 + -----------* 13

3967

= 13 + 13.5

= 26.3%

PAY BACK PERIOD METHOD

Investment - CCFAT Based period + ---------------------------

Next CFAT

10250 – 9955 3 + ------------------

3494

2953+ -----------

3494

3 + 0.08 = 3.08 years

Return of Investment on cash inflow basis (or) book profit

Average cash inflowROI= ---------------------------- * 100 Average Investment

Average cash inflow=32239/10 = 3223.9

Average Investment = 10250/2 = 5125

=3224/5125 *100 = 63%

Project 3

(Estimate budget RS 4125 Lacks)

Years PBDTLess

depreciation as per income tax

PBT Less Tax 33%

PAT ADD Depreciation

CFAT CCFAT

1 306 1444 -1138 -376 -762 1444 682 6822 456 402 54 18 36 402 438 11203 456 342 114 38 76 342 418 15384 486 291 195 64 131 291 422 19605 516 247 269 89 180 247 427 23876 456 210 246 81 165 210 375 27627 495 178 317 105 212 178 390 31528 456 152 304 100 204 152 356 35089 363 129 234 77 157 129 286 379410 393 110 284 94 190 109 299 4093

Total 4383 3505 879 289 589 3504 4093

Years CFAT CCFAT PV@13% Total PV PV@20% Total pv1 682 682 0.885 604 0.833 5682 438 1120 0.783 343 0.694 3043 418 1538 0.693 290 0.579 2424 422 1960 0.613 259 0.482 2035 427 2387 0.543 232 0.402 1726 375 2762 0.480 180 0.335 1267 390 3152 0.425 166 0.279 1098 356 3508 0.376 134 0.233 839 286 3794 0.333 95 0.194 5510 299 4093 0.295 88 0.162 48

Total 2391 1910

Present value cash inflow = 2391Present value cash outflow= 4125

PRESENT VALUE METHOD

Net present value= cash inflow-cash outflow

= 2391 - 4125

NPV @ 13% = -1734

PROFITABILITY INDEX

P.I = Total present value of cash inflow/ Total Investment

= 2391/4125

= 0.58 Times

INTERNAL RATE OF RETURN (IRR)

Inflows at lower rate-investmentIRR= Lower rate + ---------------------------------------- * (HR-LR) Inflows at lower rate-Inflow at higher rate

As a sum of pre discounted cash inflow is less then cost of investment there can’t be IRR (or) IRR < o

PAY BACK PERIOD METHOD

Investment - CCFAT Based period + ---------------------------

Next CFAT

Total investment has not been realized by the cash inflow. So there is no pay back period.

Return of Investment on cash inflow basis (or) book profit

Average cash inflowROI= ---------------------------- * 100 Average Investment

Average cash inflow=4094/10 = 409.4

Average Investment = 4125/2 = 2062.5

=409.4/2062.5 *100 = 19.8% (OR) 20%

Project 4

(Estimate budget RS 8125 Lacks)

Years PBDTLess

depreciation as per income tax

PBT Less Tax 33%

PAT ADD Depreciatio

n

CFAT CCFAT

1 1122 2844 -1722 -568 -1154 2844 1690 16902 1672 792 880 290 590 792 1382 30723 1672 673 999 330 669 673 1342 44144 1782 572 1210 399 811 572 1383 57975 1892 487 1405 464 941 487 1428 72256 1672 341 1331 439 892 341 1233 84587 1815 289 1526 504 1022 289 311 97698 1672 246 1426 471 955 246 1201 109709 1331 209 1122 350 752 209 961 1193110 1441 178 1263 417 846 178 1024 12955

Total 16071 9440 12955

Years CFAT CCFAT PV@13% Total PV PV@20% Total pv1 1690 1690 0.885 1496 0.833 14082 1382 3072 0.783 1082 0.694 9593 1342 4414 0.693 930 0.579 7774 1383 5797 0.613 848 0.482 6675 1428 7225 0.543 775 0.402 5746 1233 8458 0.480 592 0.335 4137 1311 9769 0.425 557 0.279 3368 201 10970 0.376 452 0.233 2809 961 11931 0.333 320 0.194 18610 1024 12955 0.295 302 0.162 166

Total 12955 77354 5766

Present value cash inflow = 7354Present value cash outflow= 8125

PRESENT VALUE METHOD

Net present value= cash inflow-cash outflow

= 7354 - 8125

NPV @ 13% = -771

PROFITABILITY INDEX

P.I = Total present value of cash inflow/ Total Investment

= 7354/8125

= 0.9 Times

INTERNAL RATE OF RETURN (IRR)

Inflows at lower rate-investmentIRR= Lower rate + ---------------------------------------- * (HR-LR) Inflows at lower rate-Inflow at higher rate

7354 - 8125 = 13 + ------------------ *(20-13)

7354 - 5766

-771 = 13 + -----------* 7

1588

= 13 +(-3.39)

= 9.6%

PAY BACK PERIOD METHOD

Investment - CCFAT Based period + ---------------------------

Next CFAT

8125 – 7225 = 5 + ------------------

1233

900= 5 + -----------

1233

= 5 + 0.7 = 5 .7 years

Return of Investment on cash inflow basis (or) book profit

Average cash inflowROI= ---------------------------- * 100 Average Investment

Average cash inflow=12955/10 = 1296

Average Investment = 8125/2 = 4062.5

=1296/4063 *100 = 32%

Project 5

(Estimate budget RS 1920 Lacks)

Years PBDTLess

depreciation as per income

tax

PBT Less Tax 33%

PAT ADD Depreciati

on

CFAT CCFAT

1 91.8 672 -580.2 -191.5 -388.7 672 283.3 283.32 136.8 187 -50.2 -16.6 -33.6 187 153.4 436.73 136.8 159 -22.2 -7.3 -14.9 159 144.1 580.84 145.8 135 10.8 3.6 7.2 135 142.2 7235 154.8 115 39.8 13.1 26.7 115 141.7 864.76 136.8 98 38.8 12.8 26.0 98 124.0 988.77 148.8 83 65.5 21.6 43.9 83 126.9 1115.68 136.8 71 65.8 21.7 44.1 71 115.1 1230.79 108.9 60 48.9 16.1 32.8 60 92.8 1323.510 117.9 51 66.9 22.1 44.8 51 95.8 1419.3

Total 1314.9 1631 -316.1 -104.4 -211.7 1631 1419.3

Years CFAT CCFAT PV@13% Total PV PV@10% Total pv1 283.3 283.3 0.88496 251 0.90909 2572 153.4 436.7 0.78315 120 0.82654 1273 144.1 580.8 0.69305 100 0.75131 1084 142.2 723 0.61332 87 0.68301 975 141.7 864.7 0.54276 77 0.62092 886 124.0 988.7 0.48032 60 0.56447 707 126.9 1115.6 0.42506 54 0.51361 658 115.1 1230.7 0.37616 43 0.46651 549 92.8 1323.5 0.33288 31 0.42410 3910 95.8 1419.3 0.29459 28 0.35009 37

Total 1419.3 851 942

Present value cash inflow = 851Present value cash outflow= 1920

PRESENT VALUE METHODNet present value= cash inflow-cash outflow

= 851 - 1920

NPV @ 13% = -1069

PROFITABILITY INDEX

P.I = Total present value of cash inflow/ Total Investment

= 851/1920 = 0.44 Times

INTERNAL RATE OF RETURN (IRR)

Inflows at lower rate-investmentIRR= Lower rate + ---------------------------------------- * (HR-LR) Inflows at lower rate-Inflow at higher rate

As a sum of pre discounted cash inflow is less then cost of investment there can’t be IRR (or) IRR < o

PAY BACK PERIOD METHOD

Investment - CCFAT Based period + ---------------------------

Next CFATTotal investment has not been realized by the cash inflow. So there is no pay back period.

Return of Investment on cash inflow basis (or) book profit

Average cash inflowROI= ---------------------------- * 100 Average Investment

Average cash inflow=1419.3/10 = 141.93

Average Investment = 1920/2 = 960

=141.93/960 *100 = 14.78% (OR) 15%

CHAPTER – 5

FINDINGS AND CONCLUSIONS

The study concerned with the capital budgeting with reference to BHEL. The data is collected, organized, analyzed and interpreted. BHEL has a good organization culture, excellent working environment and a very precious asset that is highly dedicate, herd-working, well qualified efficient and knowledgeable workforce.

The following findings are obtained from the analysis of data.

The first project i.e. generate is the unequal cash flows for 10 years. The initial investment is RS 5125 lacks.

1. The discounted PBP is 4.2 years. The investment will recover in 4 years and 2 months.2. NPV and IRR are positive for the proposal. Then the required rate of return 19%.3. The profitability index is 1.22 times > 14. The return of investment is 44 percentages.

The second project i.e. generate is the unequal cash flows for 10 years. The initial investment is RS 10250 lacks.

1. The discounted PBP is 3.1 years. The investment will recover in 3 years and 1 months.2. NPV and IRR are positive for the proposal. Then the required rate of return 26.35%.3. The profitability index is 1.73 times4. The return of investment is 63 percentages

The third project i.e. generate is the unequal cash flows for 10 years. The initial investment is RS 4125 lacks.

1. Total investment has not been realized by the cash inflow. So there is no pay back period (PBP).

2. NPV and IRR are negative for the proposal. As a sum of pre discounted cash inflow is less then cost of investment there can’t be

IRR (or) IRR <0. 3. The profitability index is 0.57 times, it is not good.4. The return of investment is 20 percentages.

The fourth project i.e. generate is the unequal cash flows for 10 years. The initial investment is RS 8125 lacks.

1. The discounted PBP is 5.7 years. The investment will recover in 5 years and 7 months. 2. NPV and IRR are negative for the proposal. Then the required rate of return 9.6%.3. The profitability index is 0.9 times. This is not good sign. 4. The return of investment is 32 percentages.

The fifth project i.e. generate is the unequal cash flows for 10 years. The initial investment is RS 1920 lacks.

1. Total investment has not been realized by the cash inflow. So there is no pay back period (PBP).

2. NPV and IRR are negative for the proposal. As a sum of pre discounted cash inflow is less then cost of investment there can’t be

IRR (or) IRR <0. 3. The profitability index is 0.44 times, it is very least.4. The return of investment is 14.78 percentages.

CHAPTER – 6

DATA ANALYSIS &INTREPRATION

OPERATING RESULTS RS/LKS

SL.NO DESCRIPTION

ACTUALS

2004-05 2005-06 2006-07 2007-08 2008-09

A TURNOVER-BHEL-NON-BHEL

3046171622

27697239520

61181228310

667309568

779414037

TOTAL TURNOVER 174668 267217 289491 310235 414816CHANGES IN WIPCHANGES IN FGEXPORT INCNTIVES

240072594238

316523383397

3975-88271779

1778145912283

1063749381112

GROSS TURNOVER 188601 276117 286418 334890 431503EXCISE DUTY 19597 23131 22027 27236 24537

B GTO LESS ED 169004 252986 264391 307654 406966DIDIRECT MATERIALSSUB-CONTRACT PAYMENT

POWER AND FUEL TRANSFER IN SERVICE

980433911513363

14624645917581163

1515523344911743

18384579018401394

25959297819251347

C TOTAL OF ‘C’ 100310 149626 154120 187869 263842D VALUE ADDED 68694 103360 110271 119785 143124E PERSONNEL PAYMENTS

INDIRECT MATERIALSOTHER EXPENSES-BHELOTHER EXPENSES-NON BHELPROVISIONSPROV.EXCH.VARLESS: MISC. INCOME

2313828663274793820531146565

26390313171389487835595-347500

307544007467013752-6262888351

3600140396125128481805-152411746

583654560643615402142-32413913

TOTAL OF ‘E’ 32818 40299 44494 47548 70668F GROSS MARGIN(PBIDT) 35876 63061 65777 72237 72456

DEPRECIATIONDRE ON VRS

2153601

2194 2487 3321 3978

G GROSS PROFIT (PBIT) 33122 60867 63290 68916 68478INTEREST 1105 -682 -2300 -5870 -6826

H PROFIT BEFORE TAX 32017 61549 65590 74786 75304OPERATING COST 136639 201962 221227 234677 338382

YEAR END INVENTORY DIVISION : HYDERABAD RS/LKS

DESCRIPTION ACTUALS

04-05 05-06 06-07 07-08 08-09MATERIAL INVENTORYRAW MATL & COMPINDIRECT MATERIALSMATERIALS IN TRANSITTRANSFER IN TRANSITMATLS WITH FABRICATORSSCRAP & OTHERS

167271187471918063045108

196561286503821074963278

217721546919833797968300

2545919871432541635851490

3190024001810064007100400

TOTAL OF MATLS INVENTOR 27592 33328 44163 52275 66300PRODUCTION INVENTORYWORK IN PROGRESSFINISHED GOODS

2598310679

2914813017

331234190

509048781

6150013700

TOTAL OF PRODUCTION INVENTARY

36662 42165 37313 59685 75200

TOTAL INVENTORY 64254 75493 81476 111960 141500TURNOVER 174668 267217 289491 310235 414816NO.OF DAYS OF TURNOVER 134 103 103 132 125

BALANCE SHEET

DIVISION : HYDERABAD RS/LKS

DESCRIPTIONACTUALS

04-05 05-06 06-07 07-08 08-09

RESOURCESFUNDS FROM CORP.OFFICERESERVES & SUPPLUSINTER UNIT BALANCES(NET)DEFERRED CREDITLOANS

3252133675(49905)513

3252181157(77122)1054

3252212474(129311)607

6504241734(131467)587

6504271259(173296)2566

TOTAL 87535 108341 87022 117358 107033UTILISATION OF FUNDSFIXED ASSETSGROSS BLOCKOPENING BALANCEADDITIONSDELETIONSCLOSING BALANCELESS CUM DEPRECIATION

385193936

4245533559

424553845

4630035700

461154153

5026838021

463004823

5112341214

5112311991

6311445415

NET BLOCK 8896 10600 12247 9909 17699CAPITAL WORKING IN PROGESSINTANGIBLE ASSETS

250977

587963

756319

54041667

101391930

TOTAL(A) 11482 16542 19829 16980 29768WORKING CAPITALCURRENT ASSETSINVENTORIESBOOK DEBTSCASH/BANK BALANCESLOANS & ADVANCESINTER UNIT BALANCES(NET)

63734112238209414631

75016135322464320081

814761773011217273

1114662152911424379

1411902874141524978

SUB TOTAL (B) 192697 235062 276062 351150 453597CURRENT LIABILITIESADVANCES FROM CUSTOMERSUNDARY CREDITORSOTHER LIBILITIESPROVISIONS

7084024225409117488

7675439495380023151

10481346452309354511

13196954586303465151

22598658078291089358

SUB TOTAL (C) 116644 143200 208869 254740 376332NET WORKING CAPITAL (B)-(C) 76053 91862 67193 96410 77265TOTAL 87535 108404 87022 113390 107033CAPITAL EMPLOYED (EXCL) 85026 102525 79459 107986 96894

BIBILOGRAPHY

1. Gupta. Shahi. K& Sharma.R.K: Financial management; Theory and practice 3 rd edition 2001, Kalyani publishers.

2. Khan.M.Y & Jain.P.K: Financial Management; Text, Problems and Cases 4th Edition, 2004.

3. I.M.Pandey: Financial Management; 9th edition 2005, Vikas Publishing House Pvt.Ltd.

4. Prasanna Chandra: Financial Management; Theory and Practice 5th edition 2001

WEBSITES

www.bhel.com

www.planware.com

www.studyfinance.com

www.bhelhyderabad.com

www.finance@bhel.co.in