PRINT Updated

7/29/2019 PRINT Updated

1/51

INTRODUCTION

Finance:

Finance is defined as the provision of money where it is required. Finance

refers to the management of flows of money through an organization it concerns with the

applications of skills in the manipulation, use and control of money. Every enterprise

whether big, medium it need finance to carry on its operations and to achieve its targets.

Finance is so indispensable today that it is rightly said to be life hood of an enterprise. The

subject finance has been traditionally classified into two classes

1. Public finance: - it deals with the requirements, receipts and disbursements of

funds in the government institutions like state local self governments and central

government.

2. Private finance: - it concerned with the requirements and disbursement of funds in case

of an individual, a profit seeking business organization and non profit organization.

Approaches of finance

1. The finance approach views finance as to providing of funds needed by a business on

most suitable terms this approach confirms finance to the raising of funds and to the study

of financial institutions from where funds can be procured.

2. The second approach relates finance to cash.

3. The third approach views finance is being concerned with raising of funds and their

effective utilization.

Definition of F. M.

Financial management refers to that part of the management activity which is

concerned with the planning and controlling of firms financial resources. It deals with

finding out various sources for raising funds for the firm. The sources must be suitable

and economical for the needs of the business and the most appropriate use of such funds

also forms a pat of financial management.

1


2/51

Objectives of Financial Management

Financial management is concerned with procurement and use of funds. Its main

aim is to use business funds in such a way that the firm's earnings are maximized. There

are various alternatives available for using business funds. The pros and cons of various

decisions have to look in to before making a final selection. F.M provides a frame work

for selecting proper cause of action and deciding a viable commercial strategy. The main

objective of a business is to maximize the owner economic welfare. These objectives can

be achieved by

1. Profit maximization 2. Wealth maximization

Fixed assets

Fixed assets are those assets which are required and held permanently for a pretty

long tine in the business and are used for the purpose of earning profits. The successful

continuance of the business depends upon the maintenance of such assets, they are not

meant for resale in the ordinary long as they are in work order, so they are also known as

capital assets. Land and buildings, plant & machinery, motor vans, furniture and fixtures

are some examples of these assets.

Financial transactions are recorded in the books keeping in view the going

concern aspect of the business unit. It is assumed that the business unit has a reasonable

expectation of continuing business at a profit for an indefinite period of time. It will

continue to operate in the future. This assumption provides much or the justification for

recording fixed assets at original cost and depreciating them in a systematic manner

without reference to their current realizable value.

It is useless to show fixed assets in the balance sheet at their estimated realizable

values if there is no immediate expectation of selling them.

The market value of a fixed asset may change with the passage of time, but for

accounting purpose it continues to be shown in the books at its bulk value I. e, the cost at

which it was purchased minus depreciation provided up-to-date

2


3/51

Management of fixed assets

The selection of various fixed assets require creating the desired production,

facilities and decision as regards determination o the level of the fixed assets is primarily

the task at their production/technical people. The decision relating to fixed assets involve

huge funds for a long period of time and are generally of irreversible nature affecting the

long term profitability of a concern. An unsound investment decision may prove to be

total very existence of the organization thus management of fixed assets is of vital

importance to any organization.

The process of fixed assets management involves:

1. Selection of most worthy projects or alternatives of fixed assets

2. Arranging the funds/capital for the same

First important consideration to be acquire only that amount of fixed assets

which will be just sufficient to ensure smooth and efficient running of the business. In

some cases it may be economical to buy certain assets in lot size.

Second consideration to be kept in mind is possible increase in demand of the

firm's product necessarily expansion of its activities. Hence a firm should have that much

amount of fixed assets, which could adjust to increase demand.

Third aspect of fixes assets management is the firm must ensure buffer stocks of

certain essential equipments/ services to ensure uninterrupted production in these events

of emergencies. Sometimes, there may be a breakdown in some equipment or services

affecting the entire production. It is always better to have some alternative arrangements

to deal with such situations but at the same time the cost of carrying such buffer stock

should also be evaluated. Efforts should also be made to minimize the level of buffer

stock of fixed assets be encouraging their maximum utilization during learn period,

transferring a part of peak period and living additional capacity.

3


4/51

Need for valuation of fixed assets

Valuation of fixed assets is important in order to have fair measure of profit or loss

and financial position of the concern.

Fixed assets are meant for use for many years. The value of these assets decreases

with their use or with time of for other reasons. A portion of fixed assets reduced by use is

converted into cash through charging depreciation. For correct measurement of income,

proper measurement of deprecation is essential as depreciation constitutes a part of the

total cost of production.

4


5/51

LONG TERM CAPITAL BUDGATING WITH AN EXAMPLE

(UNDEREXPANSION CATEGORY.)

Stage III-1 X 500 MW was started recently in Ramagundam. This is taken as an example

in studying how the investment decision is made. Construction itself took 5-6years. Its

benefits are enjoyed for several years. For this purpose, estimating cash outlay for 5-6

year period of construction and estimating cash inflows for 20-30 years is very critical in

practice. Into peep in to such critical, this example has been taken up.

Introduction:

RSTPS was originally conceived for an ultimate capacity of 2100 M W, consisting of

3units of 200MW & 3units of 500 MW each. This capacity has already been

commissioned and is under operation Recently one additional unit of 500MW. Capacity

was commissioned thus increasing the station capacity to 2600 MW.

Project-Highlights:

Location: Ramagundam, Karimnagar District, Andhra pradesh.

Land requirement: 10,000 Acres of land for three stages and 100Acres for railways.

Capacity: Stage I: 3 X 200 MW

Stage II: 3 X 500 MW

Stage III: 1X 500 MW

Fuel: Coal

Coal Linkage: Peak coal requirement is 9400 tones per day, based on designed calorific

value of 3200 kcal/kg. Linkage is granted by Ministry of Coal from western coalfields,

coal is also received from WCL & SCCL.

Beneficiary States: States in southern India.

Project Financing: Overall Debt-Equity Ratio is 70:30. Debt is means of domestic

borrowing carrying an overall Interest Rate of 16.5%.

5


6/51

Project cost: Power plant & facilities cost Rs.1229.38 millions including IDC, WMC/3rd

Qtr.'98 price level. (IDC-Interest During Construction). (WCM-Working Capital Margin).

Cost of Generation: 259.31 paise /KWH.

Environmental aspects: No objection certificate from APSPCB (Andhra Pradesh State

Pollution Control Board) & MOEF (Ministry of Environment and Forest).

Commissioning Schedule : 56 Months.

Demand Analysis and Justification:

RSTPS stage III is expected to yield to the southern region during 10 th plan (2002-2007)

& beyond. Southern region has experienced peaking shortage of 3226 MW (19.5%),

energy shortage of 13,349 MW (17.3%) during 19971998 it is expected to continue during

1998-1999 also. If proper steps are not taken Southern region has to face major demand &

supply gap by the end of 10th plan period. In view of above, RSTPS stage III is fully

justified in the angle of required augmentation to neutralize the shortages. This RSTPS

stage III is of 500 MW.

Usually in case of power projects, the feasibility study is conducted in terms of the

following:

Site selection

Location

Road Approach

Road Distance

Railway

Airport

Land Availability

Water Availability

Coal Availability

Infrastructure Facilities

Permanent Township

Ancillary Buildings

6


7/51

In case of RSTPS stage III also; feasibility study has been conducted on above aspects.

Basis of Cost Estimate:

l. Preliminary & Civil Works: - Rates of various items of works have been taken fromlatest awarded rates for NTPC projects duly updated to 3rd Quarter' 98. Estimates for

some items are worked out as per the analysis based on latest prevailing at

Ramagundam.

2. Mechanical, Electrical & Transportation:- It is based on awarded prices/ Bid

prices. The following are also charges:

Excise Duty @ 10% for small equipments.

CST @ 4% on supply cost for domestic component.

Customs Duty @ 22% on foreign component

3. Others:

Engineering & Administration - 6% of works cost of the project.

Trial and pre-commission charges - 0.5 % of works cost. Contingency- 3 % of

total works cost

Consultancy- 1 % of works cost.

Training of O & M staff & losses - Rs.l crore & Rs. 0.5crore on stocks

FINANCIAL ANALYSIS:

A. Phased Fund Requirement:- Anticipated phasing of requirement of funds for power

plant & facilities based on the following:

Schedule of design, procurement, fabrication and installation as per project master

network.

The terms of payment stipulated in the documents of similar equipment executed forother projects.

B) Working Capital Margin:- An amount of Rs.41.50 crores has been provided

which is 2.5% of works costs requirement & same is calculated on the following

basis:

7


8/51

1. Fuel Expenses:

Coal Cost 30 day's requirement

Oil Cost 30 day's requirement

2. O Ss M Charges; 30days requirement

3. Fuel stock:

Coal Cost 15day's requirement

Oil Cost 60day's requirement

4. Spares: 1 year less 1/5th of the initial spares

5. Receivables: 60day's requirement

C) Project Financing:- Project is financed by Debt 8s Equity in 70:30 Ratio. Equity

is Rs.638.73 crores.

Domestic Borrowings is Rs.149.65 crores.

Equity is met out from internal resources.

D) Interest During Construction:- Based on phased fund requirement & considering

the project being financed from Equity and loan in the ratio 30; 70 & simultaneous

drawl of Equity and loan. Interest during construction for power plant and facilities

works out to Rs.489.67 crores based on interest rate @ 16.5% on investment decision.

Cost of Energy: - The financial and economic cost of energy RSTPS stage III have been

worked out based on 16% ROE Capital 8s 15% average rate of interest on loan capital, an

average depreciation of 7.73 % per annum, 16.25 % interest on working capital and

annual operation of 6000 Hours.

8


9/51

Objectives of the Study

1.To analyze the conventional budgetary system in practice in NTPC.

2. To evaluate and modify to the current budgetary system with reference to the various

types of budgets.

3.To evaluate the efficiency and the budgetary control system in NTPC.

4. To offer appropriate suggestions and recommendations for improving the system.

5. To prepare projected financial statements for NTPC from the data taken from various

budgets.

Scope of the Study

The budgetary control systems in RSTPS considers generation and transmission line

projects as independent cost centers. This system prepares the Operations & Management

budget for each of the cost centers as per the requirements of the costing system. The

budget for the investment center is the sum totals of the budgets of the cost centers.

Separate budgets are prepared for revenue activities other than operations and research

and development, consultancy contracts. To facilitate management, budgets are phased

into monthly or quarterly targets. The actual performance is analyzed against this

budgeted performance in order to take corrective remedial actions if variances any exist.

The projection of internal resources over a period of 5 to 15 years and updating 5 years

plans of the Company is also done.

9


10/51

Research Methodology

The Research methodology deals with how the study was carried out. This consists of

several stages wherein the process proceeds through various stages to finally attain the

objective of the study. Hence, for any project the objective or aim of the project is to be

known. The objective of the project is set. The organization in which the project is to be

carried out is to be selected. The profile or the organization is collected from various

journals, monthly magazines, from the employees etc.,

The introduction to the topic under study has to be given. This can be obtained from

various related books, Company library. As the topic under study is on budgets, budgeting

and budgetary control, theoretical information is gathered from the above mentionedsources. The budgets i.e., types of budgets and budgetary system that is carried out in

NTPC Ramagundam is carefully studied and analyzed with the suggestions and

information given by the internal guide allotted by the company. Various budgets from

past 2 to 3 years are taken from the concerned official of the Finance Department. The

information related to the study was obtained from concerned Officers of RSTPS, NTPC

Journals, accounting books, records, RSTPS Library. Once the required information is

gathered , the analysis of those budgets is made.

This is a comparative study between various budgets of consecutive years. This

comparative study leads to draw various conclusions.

10


11/51

ORGANIZATION PROFILE

INTRODUCTION TO NTPC

At the dawn of the New Millennium National Thermal Power Corporation Ltd.,

the "Navaratna" power giant has emerged as a clear winner. Established on the 7th

November, 1975 NTPC is a testimony to the India's mission for power NTPC has been

rated as the world's sixth largest thermal power generating company in terms of

generation & most Efficient among top ten generators, with over 21,00 MW

commissioned capacity and a transmission network over 16,000 circuit kilometers.

Feeding the regional grids building up the skills of a 24,000 strong workforce upgrading

the technology of its plant and working on new generating capacities.

Corporate Vision:

To be one of the world's largest and best power utilities, powering India's growth

Corporate Mission:

Corporate mission of NTPC is to make available , reliable and quality power in

increasingly large quantities at appropriate tariffs and ensures timely realization of

revenues.

Speedily plan and implement power projects, with contemporary technologies.

Continuously develop competent human resources to match world standards.

Be a responsible corporate citizen with thrust on environment ash utilization.

Corporate Objectives :

The main Objectives of the Company are as follows:

o To add generating capacity with in prescribed time and cost.

11


12/51

o To operate and maintain power stations at high availability ensuring minimum cost

of generation.

o To develop appropriate commercial policy heading to remunerative tariffs tend

minimum receivables.

o To introduce assimilate and attain self-sufficiency in technology,

o Acquire expertise in utility management practices and do disseminate knowledge

essentially as a contribution to other constituents of the power sector in the

country.

o To develop research and development ( R&D) for achieving improved plant

reliability and to expand the consultancy operations and to participate in ventures

abroad.

CORPORATE CORE VALUES :

o Customer Focus

o Organization Pride

o Mutual Respect and Trust

o Initiative and Speed

o Total quality

FUTURE PLANS OF NTPC :

Anticipated capacity by 2012 of total NTPC is 34,265 MW.

New Projects coming up by 2012 :

New Projects MW

Green Fields (Coal Based) 5000

Expansion (Coal Based) 3500

Green Field (CC PP) 1450

Expansion (CC PP) 1700

12


13/51

DG Sets (HFO/LWSR) 500

TOTAL 12150

13


14/51

HONOURS OF EXCELLENCE :

The awards won are ......

o The Prime Ministers Shram Bhushan Awards - 1987, 1989, 1994, 1995,

1995-96.

o Meritorious productivity awards - 1985, 1986, 1987, 1990, 1991,

1992-93, 1994-95, 1995-96, 1996-97.

o CEA Gold Medal - 1997-98

o Qualified for Gold Medal - 1998-99, 1999-2000.

o Safety Award from British Safety Council - 1996, "Sword of Honour"

from British Safety Council - 1987. National Safety Award - 1987, 199-91.

o Award from all India Organizations of Employers for Best

Industrial Relations - 1994-95.

o Karmika Ratna Award of Andhra Pradesh Government - 19931997.

o Andhra Pradesh Government Award for Best Family Planning Drive -

1992.

o Best Industrial Canteen Award from Government of Andhra Pradesh

for the year 1993-04 and 1994-95.

o Raj Bhusha Award 1999-2000.

o Environment Award Power Utilities - 1999.

o IOC Award for Oil Conservation - 1993.

o Nine Employees of NTPC received the Shram Bhushan and Shram

Shri Award for the year 2001.

o Climate Protection Award 2002, to CENPEP of NTPC (Centre for Power

Efficiency and Environmental Protection).

o Golden Peacock Award for Excellence in Corporate

Governance.

o Best HR Practices Award 2002.

o World Climate Technology Award 2002 to CENPEEP of NTPC.

14


15/51

HISTORY OF RAMAGUNDAM SUPER THERMAL POWER STATION AT

DIFFERENT STAGES OF ITS DEVELOPMENT

Ramagundam, the saga of Super Thermal Power Station was built along the

southern banks of the river Godavari in Karimnagar Dist., of Andhra Pradesh. The

sprawling 10,000 acres site is an indicator of the commitment and dedication of National

Power Corporation for achieving a vowed objective of "POWER IN PLENTY", launched

upon by the Corporation more than a decade ago. A unit of NTPC LTD., setup in 1975

with an outlay of Rs.1750 crores, a pivotal power utility in Central Pubic Sector. The

gigantic 2100 MW Super Thermal Power Station now stands as testimony to that,

objective fulfilled, largest self-sustaining power station in South India.

Ramagundam today is a power station radiant with the spirit of self-reliance,

looking boldly to the future for challenges to spur it on. When the nation's prosperity

depends on the availability of more power, Ramagundam power station is all set to eater

to the rising national demand better & faster.

FINANCIAL RESULTS :2010-11 2011-2012

Gross Revenue 194511 184878

Gross Profit 65117 61211

Less :

Interest 9916 8677

Depreciation 15291 13784

Provisions (Net) 1567 1729

Prior Period Adjustments (Net) 803 1

Extra ordinary Items - Capital Receipts -- 501

Provisions for taxation

(including deffered tax of Rs.l Million) 1465 2125

Net Profit after Tax 3607535396

15


16/51

Appropriation :

Transfer to Bonds Redemption 1815 373

Proposed Dividend 7080 7079

Tax on Dividend 395 0

Transfer to General Reserve 27500 30000

Transfer to capital Reserve 100 506

Net profit after tax has increased by Rs.670 Million over the previous year.

THE YEAR AT A GLANCE

UNITS 2011 2012

Generation Million Units 138276 133178

Sale of Energy Rs.Million 190206 177868

Profit before Tax Rs.Million 37540 37521

Dividend Rs.Million 7080 7079

Dividend Tax Rs.Million 395

Retained earnings Rs.Million 28600 8317

Net fixed assets Rs.Million 198650 176787

Net worth Rs.Million 315040 286453

Loans Funds Rs.Million 312157 115812

Capital Employed Rs.Million 386343 356526

Value added Rs.Million 88084 80889

Ratio's :

Debt to equity Rs.Million 0.42 0.40

Return on capital employed % 10.88 1.93

No. of employees NOS 23527 23972

Valued added per employee Rs.Million 4.11 3.80

Face values for share Rs.Million 10.00 1000

Earning per share Rs.Million 4.62 453.07

Dividend per share Rs.Million 0.91 90.61

Book value per share Rs.Million 40.32 3666.58

16


17/51

RSTPS - AT A GLANCE :

Installed Capacity - 2100 MW

Unit Sizes - 3 X 200 MW

- 3 X 500 MW- 1 X 500 MW

Units commissioned - Unit - I - Oct 83

- Unit - II - May 84

- Unit - III - Dec 84

- Unit - IV - June 88

- Unit - V - March 89

- Unit - VI - Oct 89

- Unit - VII Commissioned

Transmission System - 2400 Circuits Kms

- 400 KV. Source of Coal

- South Godavari Coal Fileds of

Singareni Collieries.

Water Sources

- Pochampad Dam

Beneficiary States - A.P., Tamilnadu,

Karnataka,

Kerala, Goa &

Pondicherry.

Approved Investment - Rs.1702.18 Crores

Coal Consumption - 8.6 million tones per

Annum

Consumptive Water - 250 Cusees

Coal Transportation - Merry-Go-Round System

of 2.4 Km.

Total Land - 10,000 acres

17


18/51

RAMAGUNDAM SUPER THERMAL POWER STATION PROFILE :

According to the mythological legend lord Rama visited Ramagundam during

the exile period. His holy feet are enshrined in a monument, which has been preserved

over the centuries.

RSTPS - Mission :

Make available reliable and quality power in increasingly large quantities at

appropriate tariffs, and ensure timely realization or revenues.

Speedily plan and implement power projects, with

contemporary technologies.

Implement strategies diversification in the areas of R&M, Hydro, LNG and Non-

conventional and Eco-friendly fuels and explore new areas like transmission,

information technology etc.

Promote consultancy and make prudent acquisitions.

Continuously develop competent human resources to match world

standards.

Be a responsible corporate citizen with thrust on environment protection

rehabilitation and ash utilization.

RSTPS - Vision :

To be one of the worlds largest and the best power utilities, powering India's

growth.

18


19/51

NTPC RAMAGUNDAM - POLICY:

NTPC Ramagundam shall achieve performance excellence the best every time, to

the satisfaction of over state holders.

We are committed to over vision mission care values safety and statutory as well

as corporate requirements.

Together we shall project environment prevent pollution and continually improve

in areas of

a. Fuel conservation

b. Ash utilization

c. Waste Minisation

d. Effluents recirculation

e. Afforesation and

f. Environmental awareness

In this endeavor we get to continually improve over team work knowledge skills and

competencies.

THE ONSET OF RSTPS :

NTPC Ramagundarn was the third in the series of super thermal power stations set

up by the Corporation. The foundation stone for this station was laid on 14 Nov. 1978 by

late Shri Morarji Desai, then Prime Minster of India.

The Station is situated on the bank of river Godavari in Karimnagar District of

Andhra Pradesh across the Coal pithead of Singareni Collieries Company Limited. The

station has an installed capacity of 2100 MW is the backbone of the Southern Grid.

19


20/51

Within a decade the station constructed and commissioned 3 units of 200 MW

each and 3 units of 500 MW each capacity units. NTPC Ramagundam has the rate

distinction of being the only Station in the country to commission all the 6 units ahead of

schedule of a feat that will remain a record for a long time.

The station has earned the name as the beacon Light of Southern States. The

Station has excelled in all facets Operations, namely Generation, Plant Load Factor,

Environment Management, Safety Human Resource Development.

NTPC / RSTPS Achievements as a great world :

Several reputed industries have advocated the need for environment Protection

Accomplishing this cause very successfully today is NTPC using Eco friends Measures

for Economic growth.

Right from the beginning NTPC has made conscious efforts in preserve and

upgrade the Environment. A separate Environmental Management group has been set at

RSPTS.

A rate feat being the successful plantation of casuarinas and eucalyptus trees in

and around the ash dykes to prevent ash from being air borne.

At RSTPS, the accent is on not only preserving the Environment but also creating

a whole new one. This Eco-friendly approach has made the once free less and barren

Ramagundam into a sanctuary teeming with plant life.

20


21/51

RSTPS -HIGHLIGHTS :

Honours of Excellence (RSTPS)

Received CEA Gold Medal to NTPC Ramagundam on 12th June 2002. This

Award is instituted by G07 under Meritorious Productivity Awards scheme, for

excellence in power generation.

Won Silver Award in Industrial Safety

Man Power Status :

Executives 520

Non-Executives 1285

TOTAL : 1805

Performance of RSTPS :

Capacity 2100 MW

Generation 15,846 MUS

PROBLEMS AND PROSPECTS :

The future growth will, however, depend upon resolution of some of the critical

problems that are being faced by the company in terms its account receivable position and

tariff for sale of NTPC's power these problems are Seriously eroding the financial health

in the sector and has performed comparable to international standards.

It is indeed unfortunate that payment from the beneficiary SEB's have not been

forth coming and the out standings from SEB's continue to mount Central Appropriation

21


22/51

provided some help. Heavy financial commitments for the debt servicing and fuel bills in

addition to the normal operation costs have caused.

Considerable financial strain, the monthly sales of energy which are currently

around Rs.360 crores are likely to increase considerably in coming months. Poor

payments from SEB's are forcing the company to increasingly rely upon expensive short

term borrowings towards working capital requirements, thus placing additional burden on

its financial resources.

Baring these stray events the process of the company over the years has been

impressive and the future will see NTPC seeking horizons and crossings one milestones

after other.

FINANCIAL MANAGEMENT IN NTPC :

NTPC has registered a phenomenal growth since its incorporation on Nov. 7,

1979. Its gigantic investment plans to construct STPS involve a tremendous responsibility

on the Corporation to husband the resource & enforce it with great degree of purchase &

economic judgment so that the goals of corporation are reached at least cost. This calls for

high organization finance management.

The Finance function can be described as a function concerned with raising

resources at least cost, optimizing the use of its resources, maximizing profits &

minimizing losses. Associated with this is other function of record keeping of all

transactions in accordance with GAAP.

The financial function broadly covers the following areas :

l. Finance planning involving Acquisition &Administration of funds.

2. Planning & control of expenditure are operations.

3. Payments of bills & wages

4. Accounting accounts to GAAP.

5. Inventory Control

22


23/51

6. Internal Audit

7. Management information Statistics Taxes etc.

FIANCIAL PERFORMANCE OF NTPC

NTPC recorded a provisional turnover of Rs.119,947 crores during 2002-2003 as

against Rs.8,584 crores during 2001-2002.

The provisional net profit after tax for 2002-2003 is Rs.3574 crores as compared

to Rs.3540 crores last years.

The provisional Return on Capital Employed (ROCE) and Return on

Net Worth (RONW) are 10.23% and 11.31% respectively for the year 2002-

2003.

An interim dividend of Rs.400 crores has been paid to the Government

for 2002-2003.

An interim dividend of Rs.9895 millions has been paid to the Government for

2004-2005.

23


24/51

CAPITAL BUDGETING

An efficient allocation of capital is the most important finance function in modern

times. It involves decisions to commit firm's funds to long-term assets. Such decisions are

tend to determine the value of company/ firm by influencing its growth, profitability &

risk.

Investment decisions are generally known as capital budgeting or capital

expenditure decisions. It is clever decisions to invest current in long term assets expecting

long-term benefits firm's investment decisions would generally include expansion,

acquisition, modernization and replacement of long-term assets.

The activities can be listed as follows ;

Disinvestments i.e., sale of division or business.

Change in methods of sales distribution.

Undertaking an advertisement campaign.

Research & Development programmes.

Launching new projects.

Diversification

Cost reduction

Features of Investment Decisions :

The exchange of current funds for future benefits.

The funds are invested in long-term assets.

The future benefits will occur to the firm over a series of years.

24


25/51

Importance of Investment Decisions :

They influence the firm's growth in long run.

They effect the risk of the firm.

They involve commitment of large amount of funds.

They are irreversible, or reversible at substantial loss.

They are among the most difficult decisions to make.

Types of Investment Decisions :

Expansion of existing business, Expansion of

new business. Replacement & Modernization.

Evaluation criteria :

Estimation of cash flows.

Estimation of the required rate of return.

Application of a decision rule for making the choice.

Consideration of cash flows is to determine true profitability of the project and it is an

unambiguous way of identifying good projects from the pool. Ranking is possible it

should recognize the fact that bigger cash flows are preferable to smaller ones & early

cash flows are referable to later ones I should help to choose among mutually exclusive

projects that which maximizes the shareholders wealth. It should be a criterion which is

applicable to any considerable investment project independent of others.

There are number of techniques that are in use in practice. The chart of techniques

can be outlined as follows :

25


26/51

CAPITAL BUDGETING TECHNIQUES

Traditional Approach Modern Approach

Approach

(or) (or)

Non-discounted Cash Flows Disconnected Cash Flows

Pay Back Period (PB) Net Present Value (NPv)

Accounting Rate of Return (ARR) Internal Rate

Of Return (ARR)

Profitability India (PI)

Discounted Payable period

NPV :

It is classic economic method of evaluating the investment proposals. It explicitly

recognizes the time value of money. Correct postulation of cash flows arising at different

time periods improving that they differ in value are comparable only when their

equivalents present values are found out.

Steps :

1. Cash flows should be forecasted based on realistic assumptions.

2. Appropriate discount rate (that is firms opportunity cost of capital) should be identified.

3. Present value of cash flows should be calculated using

opportunity cost.

26


27/51

4. NPV is calculated by subtracting present value of cash outflows form present value of

cash inflows.

Acceptance Rule :

Accept if NPV > 0

Reject if NPV < 0

May Accept if NPV = 0

One with higher NPV is selected.

IRR :

It takes into account of the magnitude & timing of cash flows. IRR is called so

because it depends solely on the outplay & proceeds associated with the investment & not

on any rate determined outside the investment. IRR is the discount rate that make NPV =

0.

Acceptance Rule :

Accept if r > k where r = rate return

Reject if r < k k = opportunity cost of capital

May accept if r = k

Value additivity principal does not hold when IRR methods is use - IRR of projects do not

add.

Profitability Index (PI) :

It is benefit cost ratio. It is ration of present value of cash inflows at the required

rate of return, to the initial cash outflow of the investment.

PI = PV of cash inflows

27


28/51

-----------------------

Initial Cash outlay

Acceptance Rule :

Accept if PI > 1

Reject if PI < 1

May accept if PI I

PI is a relative measure of projects profitability.

Pap Back :

It is defined as the number of years required to recover the original cash outlay

invested to recover the original cash outlay invested in a project.

If project generates constant annual cash inflows, the pay back period is completed

as follows.

Pay Back = Initial Investment

----------------------

Annual cash inflow

In case of unequal cash inflows, the payback period can be found out by adding up

the cash inflows until the total is equal to initial cash outlay.

Acceptance Rule :

Accept if calculated value is less than standard fixed by management otherwise

reject it.

In case of ranking method, accept the lowest rank.

28


29/51

Discounted Pay Back Period :

One of the serious objections to pay back method is that it does not discount the

cash flows. Hence discounted pay back period has come into existence. The number of

periods taken in recovering the investment outlay on the present value basis is called the

discounted pay back period.

Discounted pay back rule is better as it does discount the cash flows until the

outlay is recovered.

ARR :

It is also known as return on investment ( ROI). It was accounting information as

revelated by financial statements, to measure the profitability of an investment. ARR can

be computed as follows:

ARR = Average Income

----------------------------

Average Investment

Average Income = Average of after tax profit. Average Investment = Half of Original

Investment.

Acceptance Rule :

Accept if calculated rate is higher than minimum rate established by the management.

Otherwise reject.

Incase of raking, highest ARR is given number one rank.

29


30/51

CAPITAL BUDGETING METHODS IN PRACTICE

In a study of the capital budgeting practices of fourteen medium to large size

companies in India, it was found tat almost all companies used by back.

With pay back and/or other techniques, about 2/3rd of companies used IRR and

about 2/5th NPV. IRR s found to be second most popular method.

Pay back gained significance because of is simplicity to use & understand, its

emphasis on the early recovery of investment & focus on risk.

It was found that 1/3rd of companies always insisted on computation of pay back for

all projects, 1 /3rd for majority of projects & remaining for some of the projects.

Reasons for secondary of DCF techniques in India included difficulty in

understanding & using threes techniques, lack of qualified professionals &

unwillingness of top management to use DCF techniques.

One large manufacturing and marketing organization mentioned that conditions of

its business were such that DCF techniques were not needed.

. Yet another company stated that replacement projects were very frequent in the

company, and it was not considered necessary to use DCF techniques for evaluating

such projects. techniques in India included difficulty in understanding & using

threes ..,techniques, lack of qualified professionals & unwillingness of top

management to use DCF techniques.

30


31/51

PROCESS

CAPITAL BUDGETING PROCESS:

At least five phases of capital expenditure planning & control can be identified:

Identification (or Organization) of investment opportunities.

Development of forecasts of benefits and costs.

Evaluation of the net benefits.

Authorization for progressing and spending capital

expenditure.

Control of capital projects.

Investment Ideas :

Investment opportunities have to be identified or created investment proposals

arise at different levels within a firm.

Nature of Ida Level

Cost reduction Plant Level

Replacement ( 50% in India cover this level)

Expansion Top management

Diversification (in India, it is insignificant)

New Product Marketing department (or) Plant Manager

Replacing an oldMachine ( or)

Improving the Factory Level.

Production techniques.

Enough investment proposals should be generated to employ the firm's funds fully well &

efficiently.

31


32/51

FORECASTING :

Cash flow estimates should be development by operating managers with the help

of finance executives. Risk associated should be properly handled. Estimation of cash

flows requires collection and analysis of all qualitative and quantitative data, both

financial and non-financial in nature. MIS provide such data.

Correct treatment should be given to :

Additional working capital

Sale proceeds of existing assets.

Depreciation

Financial flows (to be distinguished from operation flows)

EVALUATION :

Group of experts who have no ake to grind should be taken in selecting the

methods of evaluation as NPV, IRR, PI, Pay Back, ARR & Discounted Pay Back.

Pay Back period is used as "Primary" method & IRR/ NPV as "Secondary"

method in India. The following are to be given due importance.

For evaluation, minimum rate of return or cut-off is necessary.

Usually if is computed by means of weighted Average cost of Capital (WACC)

Opportunity cost of capital should be based on risky ness of cash flow of

investment proposals.

Assessment of risk is an important aspect. Sensitivity Analysis & Conservative for

costs are two important methods used in India.

32


33/51

Pay Back

YearsInitial investment

in (Thousand)

Case in flows in

Thousands

Cash out flows in

Thousand

2002-03 40000 8000 120002003-04 60000 1600 150002004-05 70000 2200 120002005-06 20000 4500 160002006-07 10000 4000 160002007-08 66000 3000 180002008-09 25000 2900 110002009-10 12000 1100 220002010-11 90000 1600 800002011-12 30000 1200 70000

Total: 423000 30100 272000

Pay back Period = Initial Investments

Annual Gash Inflows

40000 =) 5Years

8000

Interpretation: -

a) In the pay back method the Investment and the case inflows are fluctuating from

year to year where as in the year 2002-03 it is 40000 and in the year 2011-2012 is 30000

b) Cash inflows are in the order of increasing to decreasing from 2002-03 and

2011-2012

33


34/51

Profitability Index (P 1)

Year Investments (In Lakhs)

Cash (pv)

InflowsCash (Initial) Out Flows

2001-02 2945073.37 18180 200002002-03 3030293.17 24780 300002003-04 3192444.28 45060 600002004-05 3461183.11 54640 80000

2005-06 3545210.87 18630 300002006-07 9015874.00 161290 220002007-08 3991459.40 19210 330002008-09 4028114.20 11130 700002009-10 3667441.15 65420 40000

2010-11 17338000.00 19233 800002011-12 2079775.00 61323 60000

Total 498896 525000

P I = PV of Cash Inflows

Initial Case out lays

=) 498896 =)

0.950278 525000

Interpretation:

a) The Profitability index of present Value of cash inflows and cash out

flows is fluctuation from year to year in the year 2001-02the present

value of cash inflows is 18180 were as in the year 2011-12 has been

in creased with 61323

b) The highest cash in flows has been recorded in 2006-07 as 161290

and lowest has been recorded as 18180 in the year 1997-98

34


35/51

Average rate of Return

YearInvestments

(Lakhs)

Average Income

(Thousands)

(Lakhs) Cash Flows

(of the taxes)

2002-03 400000 20000 1000002003-04 480000 15000 2600002004-05 280000 28000 4400002005-06 240000 85000 7500002006-07 150000 75000 1600002007-08 260000 64000 2000002008-09 6,00000 78000 3000002009-10 100000 25000 6000002010-11 250000 18000 800000

2011-12 2760000 408000 9010000

Average Rate of Return = Average Income

Average Investments

=) 20000 =) 0.05%

400000

Interpretation: -

a) Average rate of return is calculated based on Average income and Average in

vestment where as Average income in the year 2002-03 is 20000 and Investments

in the year 2002-03 is 400000

b) The Value from 2002-03 and 2011-12 are fluctuating from year to year

35


36/51

Long Term Capital Budgeting In NTPC

PRE - INVESTMNET STAGE

In a planned economy, as in India, the identification of public sector projects needs

to be done within the overall framework of national the sectoral planning. All projects of

every sector need to be identified scientifically at the time of plan formulation. In actual

practice, however, it is observed that `identification' stage is the most neglected stage of

the project planning.

The five year plans indicate the broad strategy of planning economic growth rate

and other basic objectives to be achieved during the plan period. The macro level planning

exercise undertaken at the beginning of every five year plan indicates broadly the role of

each sector's physical targets to be achieved and financial outlays, which could be made

available for the development of the sector during the plan period.

The identification of a project in the Five Year Plan is not the sanction of the

project for implementation. It provides only the `green signal' for the preparation of

feasibility report (FRO for appraisal and investment decision. A preliminary scrutiny of

the FR of the project is done in the Ministry and thereafter copies of the feasibility report

are submitted to the appraising agencies, viz., Planning Commission, Bureau of Public

Enterprises and the Plan Finance Division of the Ministry of Finance.

Thus the organizational responsibility for identifying these projects rests with the

concerned administrative ministry, in consultation with its public enterprises.

The essential steps for project identification and preparation relates to studying (i)

imports (ii) substitutes (iii) available and raw material (iv) available technology and skills

(v) inter-industry relationship (vi) existing industry (vii) development plans (viii) old

projects etc.

36


37/51

It may be mentioned that in actual practice, these steps are hardly scientifically

studied and followed by the administrative ministry public sector undertaking at the time

of project identification. The public sector projects many a time come spontaneously on

the basis of ideas and possibilities of demand or availability of some raw materials and not

an outcome of scientific investigation and systematic search for feasible projects.

PROJECT FORMULATION :

The second stage of "Project Cycle" viz. Project Formulation, is a pre-investment

exercise to determine whether to invest, where to invest, when to invest and how much to

invest.

The project/ feasibility reports are meant to provide required information for assessing

technical, financial, commercial, organization and economic viability of the project

planning in India, mainly because of relatively late realization of its importance. As a

result, the investment decisions for large projects in the past were taken on half-baked and

illconceived projects and time-over runs and cost-over runs of public sector projects have

become a regular feature rather than exception.

In early seventies along with the setting up of the Public Investment Board (PIB)

the Government created a new project Appraisal Division in the Planning Commission.

This Division prepared and circulated "Guidelines for preparing Feasibility Reports of

Industrial Projects" in 1974. This guidelines, unlike earlier manual, indicates all the

information and data required to be presented and analysed in the feasibility report, so as

to enable the appraisal agency to carry out (i) technical analysis - to determine whether the

specification of technical parameters are realistic, (ii) financial anaylsis - to determine

whether the proposal is financially viable, (iii) commercial analysis - to determine

soundness of the product specifications, marketing plans and organization structure and

(iv) economic analysis, to determine whether a project is worthwhile from the point of

view of nation and economy as a whole.

37


38/51

The guidelines describes in details, the information required to be given and

analysed on the following issues : (a) general information of the sector, (b) objective of

the proposal, (c) alternative ways, if any of attaining the objectives and better suitability

of the proposed project,(d) project description - gestation period, costs, technology

proposed, anticipated life of the project etc., (e) demand analysis, total demand /

requirements of the country, including anticipated imports and exports and share of the

proposed project, (fl capital costs and norms assumed, activity wise and year wise, (g)

operating costs and norms, (h) revenue and benefits estimation etc.

PROJECT APPRAISAL :

The appraisal of the project follows the formulation stage. The objective of the

appraisal process is not only to decide whether to accept or reject the investment proposal,

but also to recommend the ways in which the project can be redesigned or reformulated so

as to ensure better technical, financial, commercial and economic viabilities.

The project appraised which is an essential tool for judicious investment decisions

and project selection is a multidisciplinary task. But many a times this is considered

doubt, have played an important role in contributing systematic methods for forecasting

the future and evolving appraisal methods to quantify socials costs and benefits, but they

alone can not carry out complete appraisal of an investment proposal.

The need for project appraisal and investment decisions based on social

profitability arises mainly because of the basic characteristics of developing countries

limited resources for development and multiple needs - objective of planning being

`Economic Growth with Social Justice'. The project appraisal is a convenient and

comprehensive fashion to achieve, the laid down objectives of the economic development

plan. The appraisal work presupposes availability of a certain minimum among of reliable

and up to date data in the country, as well as the availability of trained persons to carry out

the appraisal analysis.

38


39/51

As stated earlier the investment decision of public sector projects are required to

be taken within the approved plan frame work. The Project Appraisal Division (PAD) that

prepares the comprehensive appraisal note of projects of Central Plans was therefore set

up in Planning Commission. The Finance Ministry issues expenditure sanction for a11

investment proposals within the frame work of annual budget. The plan Finance Division

and the Bureau of Public Enterprises of the Finance Ministry are also required to examine

and give comments on the investment proposals of public.

Based on the above assumptions, the cost of generation could be worked out discounted

cash flow basis taking 12% IRR (Internal Rate of Return). This rate has been generally

accepted by various appraising agencies of the power projects.

Feasibility Report based on above methodology and indicating site selection, coal

linkage, power distribution examined by Central Electricity Authority in all cases where

investment is Rs.l Crore and above. Since NTPC is public sector undertaking, all the

investment decisions have to be formally sanctioned by Government after PIB's (Public

Investment Board's) clearance.

SHARE CAPITAL :

The entire share capital is owned by Government of India. During the Year no

addition has been made. However the authorized capital has been increased from Rs.

80,000 million to Rs.1,00,000 million and the face value or share has been split to Rs.10/-

each from Rs.1000/- each.

39


40/51

CAPITAL BUDGETING IN NTPC

All finance activity commences with an investment proposal, which calls for a financial

appraisal of a project. Here, capital Budgeting has its role. Each one of the projects is

appraised on following basis.

Cost Estimates.

Cost Generations.

Cost Estimates :

Feasibility Report of the project is prepared based on the cost of similar units

prevailing at the time of preparation of projects report of the latest costs are not available,

the same should be escalated. Collection of data with regard to the cost of the various

equipment should from part of a continuous planning so tat a realistic cost estimate is

made for the project Reports for civil works are generally based on NTPC schedule of

rates with reasonable premium there on.

Cost of Generation :

The financing of public sector company is generally based on Debt Equity of 3:1

the general rate of interest chargeable by the central Government on loan components is

10.5% ( Now enhanced to 11%) . The plant life as provided under the Electricity Supply

Act, 1948 is 25 years and depreciation based on this period has to be calculated on straight

line method, on 90% of the cost fixed assets. The operation & maintenance expenses are

generally of the order 2.5% of the capital cost.

40


41/51

ROLE OF FINANCE MANAGEMENT IN INVESTMENT DECISIONS IN

NTPC

Finance Manager is the number of a project team. He plays an important role in

investigation stage of the project, when various alternatives are analysed & the most

optimum solution is decided upon. The soundness upon the accuracy of the data & as a

finance manager has to questing and satisfy himself on the validity of the data.

The power projects are extremely capital intensive and before large resources are

committed to a scheme a detailed feasibility study need to be prepared covering The need

of the project The demand projections The alternatives of the site locations The broad

parameters of the plant and equipment The cost estimates The viability of the scheme.

Cost Estimates :-

Cost estimates and financial justification and returns of the projects are the areas

where financial management has to play its role. Cost estimates should be prepared by the

cost engineers and vetted by the finance manager. Cost engineering is a specialized filed

& need to be developed in the contest of power projects because of insufficient cost data

on the components of the projects.

This raises an important question of the present methodology of preparing the cost

estimates without any provision for price contingencies. Because of time lag between

preparation of cost estimates and investment decisions, after its scrutiny by the

appraising agencies, these estimates are already out of data and hence would need

updating.

41


42/51

TURN OVER

PHYSICAL:

You would happy to know that your company maintained its position as the largest

generator of electricity in the country. During the year your company has generated more

than on fourth ( 26.51%) of the total electricity generated in the country with less than one

firth ( 19.44%) of India's total generation capacity NTPG's coal and gas based stations

generated 138.28 billion units of electricity as compared the previous years generation of

133.18 billion units an increase of 3.8% over the previous year.

FINANCIAL :

Over all bases figures making an increase of 6.9% on year to year basis are as

under

Rs. Million

2010-11 2011-2012

Energy sales including energy

Internally Consumed1,90,206 1,77,868

Consultancy protect Management

And supervision fee269 285

42


43/51

[ Including key construction Project] 1,90,475 1,78,153

GENERATION AND SALES

GENERATION IN MUS - SALES IN MILLIONS

Interpretations: -

A) On the X- airs year are been shown from 2006-07 to 2011-12 and the value has been

increasing from year to year

43


44/51

b) In the year 2002-03 the generation and sale has been 117890-160183 where as on the

year 2007-08 it has been increased to 169203-192372

c) By observing the generation and sales chat we can sap there is a change from year to

year

NET WORTH AND NET ASSETS

Interpretations: -

a) Net worth and net assets has been increasing from year to year from 2002-03it is

229045 and compare to 2007-08 it has been increased to 440201

44


45/51

b) By observing the chat we can say the net worth and net assets has been

increasing from 2002-03 to 2007-08

NET BLOCK AND GROSS FIXED ASSETS

Interpretations:

a) From 2002-03 the net block and gross fixed assets is 229045

b) Where as the Net block and gross fixed asset is been increased in the year 2007-08

compare

45


46/51

PROFIT AFTER TAX

Interpretations: -

a) The chart shows the increase value after the deduction of tax in the year 2007-08

46


47/51

b) The profit is changing from year to year in the year 2002-03 it is 34245 where as

increasing value in the year 2003-2004and decreased value in the year 2004-2005

By this we can say there is a complete variation from year to year

Distribution of revenue 2011-12

Interpretations: -

47


48/51

a) In the year 2007-08 the revenue is distributed in the from of fuel retained earning,

dividends in latest finance change, depreciation and for employees

b) Where as in the year 2007-08 it is been fluctuated the rates compare to the year

2007-08

NTPC On-Going Capacity addition profile:

SI.No. Project Capacity On-going

1. Northern Region : 1000

500 (500 MW

already

i) Rihand - II

ii) Feroz Gandhi Unchahar-III 210 210

iii) Koldam HEPP 800 800

2. Eastern Region :

i) Khahalgaon-TI (Phase-I & Ii) 1500 1500

ii) Barh 1980 1980

3. Western Region:

i) Vindhyachal - III 1000 1000

ii) Sipat - 1 1980 1980

iii) Sipat - II 1000 1000

iv) Joint Venture with SAIL 500 500

TOTAL: 9970 9470

48


49/51

CONCLUSIONS

From the study of project cost estimates it has been noticed that the originally

sanctioned amount had been incurred obtaining cabinet approval with the

result the cabinet faced with a fast accomplishment.

It is aware that several projects taken up 6-7 years ago, now about to complete has

been affected considerably by inflation in the wake of the west Asia war & the

increase in oil prices.

Due to technical difficulties many of the project have taken a long time for

Commissioning resulting in considerable cost overseas.

During the examination of same of the revised cost estimates, PIB had occasion of

note that the FRs. Originally prepared were often inadequate

The cost of same of the project has gone up by 100 or more

The administrative ministries monitoring the progress of these projects were

Aware of the increased costs but in most cases no action was taken to seek revised

sanction.

There is an imperative need for enforcing greater financial discipline.

49


50/51

SUGGESTIONS

1. The moment the project authorities became aware of the increased casts, it is

Necessary to draw up a revised approval of the cabinet.

2. It is essential administrative ministries make full use of the existing institutions &

devote greater attention in the preparation of adequate feasibility report.

3. If detailed project report is prepared with in a reasonable time, it should be

Possible for the authorities to ascertain the cost of project

4. There should be a system of continues monitoring & close self-liason.

5. It is essential to tighten up the existing procedures 8v take a serious view of cases

when the project authorities do not came up for sanction of revised cost estimates

even when they are aware of the cost exceeding the sanction.

6. In the light of above, there should be a review of the progress in regard the

preparation of project * initiate action urgently to finalized them bring them before

competent authority as required.

50


51/51

BIBLIOGRAPHY

Financial Management - I.M. Panday.

Annual Report of NTPC.

Finance for Non-Finance executive Report.

Detailed Project Reports of RSTPS.

PRINT Updated

Documents

Transcript of PRINT Updated