CHAPTER I INTRODUCTION

INTRODUCTION:
As per the curriculum of Sri Venkateswara University, every MBA student has to undergo an Iindustrial Training in any industry/organization of his/her choice. During the course of training period, every student gets a golden opportunity to get practical training in an organization/industry. I am fortunate enough to get this opportunity of undergoing training in BHEL, Hyderabad which is a public sector company engaged in producing heavy electrical machinery, turbines and equipments. BHEL is the key industry in the Indian economy meeting the crucial power needs of the country. To win the competitive edge, every organization is much concentrating on the financial aspect of development. A finance managers job begins even before a business actually comes in to actions and continues till the very end. The activities of finance manager include procurement of funds from various resources, determining where to invest, the extent of investment and analysis of overall performance of the organization. In the area of finance, I have chosen the project work on Capital Budgeting because it is the most crucial financial decision of a firm. It relates to the selection of an asset or investment proposal or course of action whose benefits are likely to be available in future over the lifetime of the project. The following aspects of capital budgeting has inspired me to take up the topic: Capital budgeting decision involves critical analysis of risk / return. The benefits from the investment proposal deferred in to the future with an immediate cash flow / commitment.

MEANING:

Capital budgeting decision refers to assets that are in operations and yield a return over a period of time, usually exceeding one year. It is a long-term investment decision involving huge capital expenditures. The main characteristics of a capital expenditure are that the expenditure is incurred at one point of time whereas benefits of the expenditure are realized at different points of time in future. Capital budgeting process involves planning, availability and controlling, allocation and expenditure of long-term investment funds.

The following are some of the examples of capital expenditure:

1. Cost of acquisition of permanent assets such as land and building plant and machinery, goodwill etc. 2. Cost of addition, expansion, improvement or alteration in the fixed assets. 3. Cost of replacement of permanent assets. 4. Research & Development Projects costs, etc.

DEFINITIONS:
Charles T. Horn green has defined Capital Budgeting as Capital Budgeting is longterm planning for making and financing proposed capital outlays.

In the words of Lynch, Capital Budgeting is concerned with planning and development of available capital for the purpose of maximizing the long-terms profitability of the concern.

OBJECTIVES OF THE STUDY:

The case study CAPITAL BUDGETING AND INVESTMENTS APPRAISAL OF BHEL undertaken with the following objectives: To study the Capital Budgeting system in BHEL, Ramachandrapuram Hyderabad. To study its impact of the future of the company. To understand the various kinds of Capital Budgeting to the problems faced by the organization. To outline the factors and consideration that goes in to making a capital investment decision. To understand the various methods, for determining the size of the capital budget and evaluating investment proposals. To appreciate the good points and to find out drawbacks of each methods while evaluating. To have an insight in to the various intricacies of discounted cash flows methods. To analyze the strengths and weaknesses of existing process in capital budgeting. To measure the profitability of the project by considering all cash flows. To make recommendations and to improve further process of capital budgeting.

SOURCES OF DATA:

PRIMARY DATA Interaction with the Planning and Development Department. Interaction with the Finance Department

SECONDARY DATA Capital Budgeting manual of BHEL. Accounting manuals of BHEL.

WWW.BHEL.COM

METHODOLOGY
1. The Capital Budgeting mechanism is studied in detail. 2. The various factors of Capital Budgeting management are studied in detail. 3. The technical analysis in respect to Internal Rate of Return (IRR), Net Present Value (NPV) and Discounted Cash Flow techniques has been studied.

FRAME WORK OF THE STUDY

The entire study is organized in the five chapters.
1. The first chapter of study contains introduction, objectives of the study, methodology of the study, need for the study and limitations of the study. 2. The second chapter includes the profile of BHARAT HEAVY ELECTRICALS LIMITED.
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3. The third chapter concentrates on the theoretical aspects of the Capital Budgeting. It includes capital budgeting approaches and risk and uncertainty in the capital budgeting. 4. And in depth study of Capital Budgeting of BHEL, Ramachandrapuram Hyderabad is presented in the fourth chapter. 5. And the last chapter concluded the study with data analysis and interpretation with findings and some suggestive measure for better performance.

LIMITATIONS

Financial matters are sensitive in nature, the same could not acquire easily. The serious limitations of the study are the time factor. Another limitation of the study is collecting data from finance department and warehouse superiors were difficult as they were too busy in their own work.

CHAPTER II COMPANY PROFILE

COMPANY PROFILE
BHEL is one of the largest engineering and manufacturing enterprise in India and is one of the leading international companies in the field of power. BHEL offers a wide spectrum of products and services for core sectors like power generation, transmission and distribution, industry, transportation, oil and gas, etc. besides supply of non-conventional energy systems. Bharat Heavy Electricals Limited was established in the year of 1956. The company has celebrated its Golden Jubilee in 2006. Its first plant was setup in Bhopal 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 companys inherent financial strengths can be seen from its net worth, debt equity ratio and cash surplus. The company has a net worth of Rs. 6027 crores as on 31.03.2005. The Companys cash surplus stood over Rs. 3200 crores as on 31.032005 and its debt equity ratio is at 0.09. It has been earning profit continuously since 1971-72 and achieved a sales turnover of Rs. 10336.4 crores with a profit before tax of Rs. 1581.06 crores in 2004-05. Constant increase in the Net Asset Value (NAV) per share indicates the intrinsic strength for the company. At the end of the year 2004-05 outstanding orders in hand for execution in future, stand at over Rs. 3200 crores. 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, 4 Power Sector Regional Centre s, over 100 Project Sites, 8 Service Centers, 18 Regional Offices and one subsidiary enables the Company to promptly serve its customers and provide them with suitable products, systems and servicesefficiently 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,

ABOUT BHEL 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 lions share in BHEL Corporations overall business operation. The Hyderabad unit was setup in 1963 and started its operations with manfacture 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 manufacture 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 MNCs 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 Tiruchirapally 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.
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GROWTH OF BHEL
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 Board and also 12MW 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, Transmission, Industry, Oil and Gas. It now boasts the largest number of products under a single roof as compared to any of the other BHEL Units.

REWARDS AND AWARDS

BHEL employees zeal to excel supported by the companys constant encouragement has also resulted in 52 of its employees winning a sizeable number of 40 prestigious Prime Ministers Shram Awards. BHEL employees being conferred one of the countrys highest civilian honors Padma Shri for the years 2005 and 2006, by the President of India. BHEL bags ICWAI National Award for excellence in Cost Management. EEPCs Top export award conferred on BHEL for the 17th Consecutive year.

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ACHIEVEMENTS
BHEL has already attained ISO 9000 and all the major units and divisions of BHEL have been upgraded to the latest ISO-9001:2000 version quality standard certification for quality management. All the major units or divisions of BHEL have been awarded ISO-14001 certification for environmental management systems and OHSAS-18001 certification for occupational health and safety management systems. BHEL has achieved substantial savings of Rs. 1770 million during fiscal 2006-07, as a result of the implementation of an improvement projects rewards scheme (IMPRESS). Outbidding a Chinese multinationals in an open global tender, BHEL has won an order for a turbo Blower package from Rashtriya Ispat Nigam Limited (RINL) valued at over Rs. 1060 million. BHELs power generating sets achieved record generation in first nine months of 200607. 87% of the coal based sets and 100% of nuclear sets added in the country during the year were of BHEL make. BHEL commissions Indias largest Solar-Diesel Hybrid Power Plant in Lakshadweep.

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CONTRIBUTIONS OF DIFFERENT SECTORS

POWER GENERATION:Power generation sector comprises of thermal, gas, hydro and nuclear power plant business. BHEL has proven turnkey capabilities for executing power project from concept to commissioning. It possesses the technology and capability to produce thermal sets with super critical parameters up to 100 MW units rating and gas turbine generator set of up to 250 MW unit rating. Co-generating and combined cycle plants have been introduced to achieve higher plant efficiencies. To make efficient use of high ash content coal available in India, BHEL also supplies circulating fluidized bed combustion boilers for thermal plants. The company manufactures 220/235/500 MW nuclear turbine - generator sets. Custom made hydro sets of Francis, and Kaplan types for different head discharge combinations also engineered and manufactured by BHEL.

INDUSTRIES:BEHL is a major contributor of equipment and systems to industries: Cement, Sugar, Fertilizer, Refineries, Petrochemicals, Paper, Oil and Gas, Metallurgical and other process industries. The range of systems and equipment supplied includes. Captive power plants, Co-generation plants, DG power plants, Industrial boilers and auxiliaries, waste heat recovery boilers, Gas turbines, Heat Exchangers and pressure vessels, Coal and ash
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handling plants, Centrifugal compressors, Electrical machines? Pumps, Valves, Seamless steel tubes, Electrostatic precipitators, Fabric filters, Reactors, Fluidized bed combustions boilers, Chemical recovery boilers, Process controls and Material handling systems.

TRANSPORTATION:BHEL is involved in the development, design, engineering, marketing, production, installation, and maintenance and after-sales service of rolling stock and fraction propulsion systems. In the area of rolling stock, BHEL manufactures electric. Locomotives up to 5000 Hp, diesel electrical locomotives from 350 Hp to 3100Hp, both for mainline and shunting duty applications. BHEL is also producing rolling stock for special applications viz., overhead equipment cars, special well wagons, rail-cum-road vehicle, etc. Besides traction propulsion systems for in-house use, BHEL manufactures traction propulsion for other rolling stock producers of electric locomotives, diesel electric locomotives, electric multiple units and metro cars.

RENEWABLE ENERGY:Technologies that can be offered by BHEL for exploiting non-conventional and renewable sources of energy include: wind electric generators, solar photo voltaic systems, stand alone and grid-interactive solar power plants, solar heating systems, solar lanterns and battery-powered road vehicles. The company has taken up R&D efforts for development of multi-junction amorphous silicon solar cells based systems. BHEL also undertakes projects in the area of distributed power covering small hydro and gas engine based generation systems.

OIL AND GAS:-

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BHEL is a major contributor to the oil and gas sector industry in the country. BHELs product range include Deep Drilling Oil Rigs, Mobile Rigs, Work Over Rigs, Well Heads and X-Mass Trees (of up to 10,000 PSI rating), Choke and Kill-manifolds, Full Bore Gate Valves, Mud Valves, Mudline Suspension Systems, etc. BHEL is the single largest supplier of Well Heads, X-Mass Trees and Oil Rigs to ONGC and OIL.

TRANSMISSION AND DISTRIBUTION:BHEL offers wide-ranging products and systems for T and D applications. Products manufactured include: Power transformers, Instrument transformers, Dry type transformers, Series and shunt reactors, Capacitors banks, Vacuum and SF6 circuit breakers, Gas insulated switchgears, Energy meters, SCADA systems and insulators. BHEL has indigenously developed state-of-art controlled shunt reactors and 400 KV FACTS (Flexible AC Transmission Systems). The company undertakes comprehensive projects to reduce Ate losses in distributions systems.

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PRODUCT PROFILE

PRODUCTS
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

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Pumps Pulverizers Switchgears Solar Water Heating Systems Oil Rigs Electrics for Urban Transportation System

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BHEL The largest Turbines manufacturer in India, with the stated of - art Facilitates in all area of Gas Turbines 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 worlds largest experience of firing highly volatile naphtha fuel on heavy-duty gas turbines.

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BHEL has the capacity 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 up to 6000 C. Steam Turbines are manufactured under technical collaboration with Siemens, Germany covering the whole range of requirements for Drive, Cogeneration, Captive Power, Utility and Combined Cycle applications. BHEL today, is fully equipped to provide comprehensive services to clients covering system engineering, equipments design, and turnkey erection and commissioning.

BHEL made its foray into Centrifugal Compresses in the year 1970 with technical collaboration from Nuova Pignone, Italy and since then has been catering to the Fertilizers,
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Refmery Petrochemical and other process industries. BHEL today, has build up a cumulative experience of more than 30 million hours of operation for various applications. BHEL offers CENTRIFUGAL compressors for pressures as high as 350KglCm2 and flows up to 350,000 Nm3/Hr. BHEL has the unique capability of offering the Compressor with any kind of drive being a manufacturer of Gas Turbines, 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, anitsurge 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/Specifications as API 610 Centrifugal Pumps API 611 Auxiliary Steam Turbine 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
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Compressors API 676 Positive Displacements Pumps IS 325 Auxiliary Electric Motors ASME PTC 10 Performance Test ASME Sec. VIII & IX Heat Exchangers

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BHEL presently has manufactured Turbo-Generators of rating up to 560 MW and is in the process of going up to 660 MW. It has 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 divers industrial applications like Paper, Sugar, Cement, Petrochemical, Fertilizers, Rayon Industries, etc. Based on proven designs and know - how based by over three decades of experience and accreditation of ISO 9001, the Turbo generators 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 BHELS performance.

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BHEL started manufacture of Pumps during the mid-sixties under technical collaboration with M/s. Sigma Lutin, Czechoslovakia, to meet the requirements of 60 MW, 110 MW and 210MW thermal power stations, the scope of which was widened to meet the requirements of power plants up to 500MW, with the help of another collaboration with Mis Weir Pumps, U.K. BHEL has also made some in-house product development to gain spin off benefits from the above collaborations 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 Mis Sulzer Pumps, Germany and recommended the upgraded 200 KHI-S Boiler Feed Pump to all customers of 110 MW & 210 MW P6wer Stations operating with the earlier Czech design for increase of pump availability and reliability and also considerable reduction in operational costs.

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Pulverizes

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-theart 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.

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Solar Water Heating Systems

Description:
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 37Lakh 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); In the BHEL make Solar Collector, stabilized efficiency values up to 65% is assured under normal circumstances over a long period without degradation.

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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.

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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, and 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.

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1. Total inspection of rig equipment 2. Major overhauling of rig equipment 3. Supply of spares (for BHEL make rigs) 4. Refurbishment of rig equipment 5. Repairs on mast and substructures and reassessment of the structure 6. Up gradation of rigs 7. Supply and installation of Independent Rotary Drive system on the conventional drilling rigs.

Electrics for Urban Transportation system:

12KV AC. 50HZ, Phase. Board gauge/mater gauge, Electrical multiply Units with DC

Drivers. 1500 VDC, broad gauge/meter gauge. Electric Multiple Units with DC Drives. 25 KV AC/1500 VDC broad gauge. Electric Multiple Units with 3 phase drives. Diesel Electricity at Multiple Units. Metro Railway.
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 Tram Cars.

BHEL ORGANISATION VISION, MISSION AND OBJECTIVES

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. Providing better human friendly envy. Compliance with applicable legislation and regulations. Meeting customer satisfaction.
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COMPANY OBJECTIVES

GROWTH
To 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 companys 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

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

CHARECTERSTICS
Public sector, because the company under taken by Government. Government share capital is 67% remaining amount invested by general public. Manufactured heavy electrical equipments. Indian company, because company name started with Bharat. Transformation of the goods to other manufacturing company not to directed customer. The company restricted by companies act, 1956.

CUSTOMER SATISFACTION
By providing better quality products, services and systems it can enables the company to promptly serve its customers & provide them with suitable products, systems & services efficiently and at competitive prices.

SWOT ANALYSIS OF BHEL

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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

BHEL has skilled, flexible, technical, trained workforce who can adopt themselves to the changes in the market.

BHEL has excellent state of art facilities. BHEL is a well-established company with manufacturing wide variety of products and services with a satisfactory record of customer satisfaction.

There are many engineers who are engaged in producing good quality product at competitive prices and putting their best efforts to their extent possible in the production process.

Product manufactured to International Quality. Low labor Cost and Low manufacturing cost. There is a good relationship between workers and management. Rewards for outstanding performances.

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WEAKNESSES

The company is not able to supply goods within promised delivery schedules. Hence, cost of production increases.

Because organization is very old, some of the employees do not know how to operate the system.

System facility is inadequate. No Financial package. Slippage in delivery commitments. Stress among high cadre employees. 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.

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THREATS
The government is liberalizing the policy of imports and licensing the production equipment to the private sector. Hence, competition is increasing.

MNCs taking away good employees with attractive packages. Government taxation policy against manufacturing sector increases the price of the product.

CHAPTER III
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THEORITICAL ASPECTS OF CAPITAL BUDGETING

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.

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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 managements 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 FEATURES

1. 2. 3. They have long-term consequences They often involve substantial outlay. They may be difficult or expensive.

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FEATURES
1. 2. 3. 4. 5. 6. 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 companys 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
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 Capital investment decisions are of national importance because of it determines

employment, economic activities and economic growth.

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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.

CAPITAL BUDGETING DECISION MAKING PROCESS

PROJECT GENERATION

DEVELOPING THE ALTERNATIVES

EVALUATION OF ALTERNATIVES

SELECTION OF THE PROJECT

IMPLEMENTATION

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PERFORMANCE REVIEW

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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.

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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 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.

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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 techniques 2. 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.

1. 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 cashflows 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 = Ct -----

Initial investment

t=1(1+rt)t Where Ct = Cash flow at the end of year t Rt = Discounted rate for year t

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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, ACCEPT ZERO, REJECT

If NPV<

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.

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MERITS:
1) 2) It recognizes the time value of money. 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.

45

2. 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: n Investment = Ct T=1(1+r) Where: Ct = Cash flow at the end of the year r = internal rate of return (IRR) t = life of the project

Applying following stapes can calculate IRR:

Step 1
Calculate cash flow after tax.

Step 2
Calculated fake payback period. INITIAL INVESTMENT AVERAGE CASH FLOWS

PBP=

46

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 negative NPV.

NPV

and another giving

Step 8
Actual IRR can be calculated by using the following formula: LR + P.V of cash inflows at LR-P.V cash outflows P.V of cash inflows at LR-P.V of cash inflows at HR (HRLR)

IRR=

Where:
R = interest rate, LR = lower rate HR = Higher rate
47

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) 2) It recognizes the time value of money. 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.

48

3. 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:

PI=

TOTAL PRESENT VALUE OF CASH INFLOWS TOTAL PRESENT VALUE OF CASH OUTFLOWS

MERITS:
1) 2) It gives due consideration to the time value of money. Since the present value of cash inflows is divided by initial cash outflows it is a

relative measure of the projects profitability.

DEMERITS:
1) 2) It is difficult to understand It involves more computation than traditional methods.

49

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.

PBP=

ORIGINAL INVESTMENT 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.

50

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 PBP:

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 with the project is resolved and vice versa.

PBP the faster the uncertainty associated

51

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) 2) 3) It is the best method in case o evaluation of single project. It is to calculate and simple to understand. It is bases on the cash flow analysis.

DEMERITS:
1) 2) It completely ignores all cash flows after the payback period. It completely ignores time value of money.

In case the cash flow is 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.

52

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 ARR TAX AVERAGE INVESTMENTS * 100

Average Investment = Net Additional working capital + Salvage value + 1/2(Original Investment-Salvage value) Average Annual Profit After Tax= TOTAL CASH FLOW 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.
53

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.

CHAPTER IV CAPITAL BUDGETING IN BHEL

54

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

The Capital Budgeting in BHEL is based on capital budget manual, which covers the following aspects.

1) CAPITAL FUNDS BUDGET:

Five year plan Annual plan exercise Non plan budget 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

55

CAPITAL FUNDS BUDGET

Capital funds budget is what enables a programmed of action on all capital expenditure items to be grouped in one consolidated document. This outlines the proposal for creation of new assets additions for increase in production; diversification or reduction of cost ensures how these ventures will be financed over a given period. Included five years plan, annual plan exercise and non-plan budget exercise, which are described below.

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
56

of the future stream of net cash benefits expected from the proposal is greater than the initial cash outlay required to implement the proposal.

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 SOURCES. 2) 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.
57

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 companys 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.

58

CHAPTER V DATA ANALASIS AND INTERPRETATION

59

PROBLEM PROJECTS EVALUTED PROJECTS Cost of Investment(Lakhs) Project1 5125 Project2 10250 Project3 Project4 Project5 4125 8125 1920

Year PBDT 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10 TOTAL

PROJECT 1 PROJECT 2 PROJECT 3 PROJECT 4

1020

1520

1520

1620

1720

1520

1650

1520

1210

1310

14610

3060

4560

4560

4860

5160

4560

4950

4560

3630

3930

43830

306

456

456

486

516

456

495

456

363

393

4380

1122

1672

1672

1782

1892

1672

1815

1672

1331

1441

16070

60

PROJECT 5

91.8

136.8

136.8

145.8

154.8

136.8

148.5

136.8

108.9

117.9

13140

Depreciation as per the profit and loss account 15% SLM Depreciation as per income tax Act 1st year 35%, 2nd year onward 15% (Dep-method) Tax rate 33% Present value factor 13% -

SOLUTION PROJECT 1
(Estimated budget Rs 5125lacks) LESS DEP AS PER INCOME TAX 1794 500 425 361 307 261 222 188 160 136 4354 (-)TAX 33% -255 337 361 415 466 415 471 439 346 387 3382 ADD: DEP 1794 500 425 361 307 261 222 188 160 136 4354

YEARS

PBDT

PBT

PAT

CFAT

CCFAT

1 2 3 4 5 6 7 8 9 10

1020 1520 1520 1620 1720 1520 1650 1520 1210 1310 14610

-774 1020 1095 1259 1413 1259 1428 1332 1050 1174 10256

-519 683 734 844 947 844 957 893 704 787 6874

1276 1183 1159 1205 1254 1105 1179 1081 864 923 11229

1276 2459 3618 4823 6077 7182 8361 9442 10306 11229

TOTAL

61

YEARS
1 2 3 4 5 6 7 8 9 10

CFAT 1276 1183 1159 1205 1254 1105 1179 1081 864 923 11229

CCFAT 1276 2459 3618 4823 6077 7182 8361 9442 10306 11229

PV@13% 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295

PVCFAT 1129.26 926.28 803 738.66 680.92 530.4 501 406.45 287.71 272.28 6276.25

PV@20% 0.883 0.694 0.579 0.482 0.401 0.335 0.279 0.332 0.194 0.161

PVCFAT 1126.70 821 671.06 580.81 502.85 370.17 328.94 358.89 167.61 148.60 5076.66

TOTAL

PAY BACK PERIOD:

= 4+ 5125-4823/1254
62

= 4.2 months NET PRESENT VALUE: NPV = Present value of cash inflows - cash outflows (Investment) = 6276.25 5125 = 1151.25

INTERNAL RATE OF RETURN:

= 13+ 6276.25-5125/ (6276.25-5076.66)*(20-13) = 13+ 1125.25/ (1199.59)*(7) = 13+ 6.56 = 21. 56%

RETURN ON INVESTMENT:

Average cash flow = cash flows/10 = 11229/ 10 = 1122.9 Investment = Investment/2 = 5125/2

63

= 2562.5

= 44%

PROFITABLE INDEX:

Total present value of cash flow =6276.25 Total Investment =5125

= 1.22 Times

64

PROJECT 2
(Estimated budget Rs 10250lacks) LESS DEP AS PER INCOME TAX 3588 999 850 722 613 521 444 377 320 272 8706 (-)TAX 33% -174.24 1175.13 1224.3 1365.54 1500.51 1332.87 1486.98 1380.39 1092.3 1207.14 ADD : DEP 3588 999 850 722 613 521 444 377 320 272 8706

YEARS

PBDT

PBT

PAT

CFAT

CCFAT

1 2 3 4 5 6 7 8 9 10 TOTAL

3060 4560 4560 4860 5160 4560 4950 4560 3630 1310 43830

-528 3561 3710 4138 4547 4039 4506 4183 3310 3658 35124

-353.76 2385.87 2485.7 2772.46 3046.49 2706.13 3019.02 2802.61 2217.7 2450.86

3234.24 3384.87 3335.7 3494.46 3659.49 3227.13 3463.02 3179.61 2537.7 2722.86 32239.08

3234.24 6619.11 9954.81 13449.27 17108.76 20335.89 23798.91 26978.52 29516.22 32239.08

65

YEARS 1 2 3 4 5 6 7 8 9 10 TOTAL

CFAT 3234.24 3384.87 3335.7 3494.46 3659.49 3227.13 3463.02 3179.61 2537.7 2722.86 32239.08

CCFAT 3234.24 6619.11 9954.81 13449.27 17108.76 20335.89 23798.91 26978.52 29516.22 32239.08

PV@13% PVCFAT 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295 2862.16 2650.85 2311.80 2143.22 1986.22 1550.05 1471.99 1196.04 844.76 802.12 17819.23

PV@20% PVCFAT 0.883 0.694 0.579 0.482 0.401 0.335 0.279 0.332 0.194 0.161 2695.20 2350.60 1930.38 1685.21 1470.66 1080.76 966.46 739.47 491.82 439.75 13850.35

PAY BACK PERIOD:

= 3+ 10250-9954.81/3494.46 = 3.1 months NET PRESENT VALUE: NPV = Present value of cash inflows - cash outflows (Investment) = 17819.23 10250 = 7569.23

66

INTERNAL RATE OF RETURN:

= 13+ 17819.23- 10250/ (17819.23-13850.35)*(20-13) = 13+7569.23 / (3968.88)*(7) = 13+ 13.35 = 26. 35% RETURN ON INVESTMENT:

Average cash flow = cash flows/10 = 32239.08/ 10 = 3223.90 Investment = Investment/2 = 10250/2 = 5125

= 63% PROFITABLE INDEX:

PI = 17819.23/1025 = 1.73 Times

PROJECT 3
67

(Estimated budget Rs 4125lacks) LESS DEP AS PER INCOME TAX 1444 402 342 291 247 210 178 152 129 109 3504 (-)TAX 33% -375.54 17.82 37.62 64.35 88.77 81.18 104.61 100.32 77.22 93.72 ADD : DEP 1444 402 342 291 247 210 178 152 129 109 3504

YEARS

PBDT

PBT

PAT

CFAT

CCFAT

1 2 3 4 5 6 7 8 9 10 TOTAL

306 456 456 486 516 456 495 456 363 393 4383

-1138 54 114 195 269 246 317 304 234 284 879

-762.46 36.18 76.38 130.65 180.23 164.82 212.39 203.68 156.78 190.28

681.54 438.18 418.38 421.65 427.23 374.82 390.39 355.68 285.78 299.28 4092.93

681.54 1119.72 1538.1 1959.75 2386.98 2761.8 3152.19 3507.87 3793.65 4092.93

YEARS 1 2

CFAT 681.54 438.18

CCFAT 681.54 1119.72

PV@13% 0.885 0.783

PVCFAT 603.13 343.16

PV@20% 0.883 0.694

PVCFAT 567.95 304.29

68

3 4 5 6 7 8 9 10 TOTAL

418.38 421.65 427.23 374.82 390.39 355.68 285.78 299.28 4092.93

1538.1 1959.75 2386.98 2761.8 3152.19 3507.87 3793.65 4092.93

0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295

289.96 258.60 231.88 180.03 165.94 133.79 95.13 88.16 2389.80

0.579 0.482 0.401 0.335 0.279 0.332 0.194 0.161

242.12 203.34 171.69 125.53 108.95 82.72 55.38 48.33 1910.31

NET PRESENT VALUE: NPV = Present value of cash inflows - cash outflows (Investment) = 2389.80 4125 = -1735.2 INTERNAL RATE OF RETURN:

= 13+ 2389.80- 4125/ (2389.80-1910.31)*(20-13) = 13+ (-1735.2) / (479.49)*(7) = 13+ (-25. 3) = 12.5%

RETURN ON INVESTMENT:

69

Average cash flow = cash flows/10 = 4092.93/ 10 = 409.29 Investment = Investment/2 = 4125/2 = 2062.5

= 20% PROFITABLE INDEX:

PI = 2389.80/4125 = 0.58 Times

PROJECT 4
(Estimated budget Rs 8125lacks)

70

YEARS

PBDT

LESS DEP AS PER INCOME TAX 2844 792 673 572 487 341 289 246 209 178 6631

PBT

(-)TAX 33% -568.26 290.40 329.67 399.30 463.65 439.23 503.58 470.58 370.26 416.79

PAT

ADD: DEP 2844 792 673 572 487 341 289 246 209 178 6631

CFAT

CCFAT

1 2 3 4 5 6 7 8 9 10 TOTAL

1122 1672 1672 1782 1892 1672 1815 1672 1331 1441 16071

-1722 880 999 1210 1405 1331 1526 1426 1122 1263 9440

-1153.74 589.60 669.33 810.70 941.35 891.77 1022.42 955.42 751.74 846.21

1690.26 1381.60 1342.33 1382.70 1428.35 1232.77 1311.42 1201.42 960.74 1024.21 12955.80

1690.26 3071.89 4414.22 5796.92 7225.27 8458.04 9769.46 10970.88 11931.62 12955.80

YEARS 1

CFAT 1690.26

CCFAT 1690.26

PV@13% 0.885

PVCFAT 1495.80

PV@20% 0.883

PVCFAT 1408.55

71

2 3 4 5 6 7 8 9 10 TOTAL

1381.60 1342.33 1382.70 1428.35 1232.77 1311.42 1201.42 960.74 1024.21 12955.80

3071.89 4414.22 5796.92 7225.27 8458.04 9769.46 10970.88 11931.62 12955.80

0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295

1081.99 930.30 848.03 775.26 592.12 557.43 451.93 319.81 301.72 7354.41

0.694 0.579 0.482 0.401 0.335 0.279 0.332 0.194 0.161

959.44 776.81 666.81 574.02 412.85 365.99 279.41 186.19 165.42 5795.51

PAY BACK PERIOD:

= 5+ 8125-7225.27/1232.77 = 5.7 months NET PRESENT VALUE: NPV = Present value of cash inflows - cash outflows (Investment) = 7354.40 8125 = -770.60

INTERNAL RATE OF RETURN:

72

= 13+ 7354.40 8125/ (7354.40 5795.51)*(20-13) = 13+ (-770.60) / (1558.89)*(7) = 13+ (-3.46) = 9.54% RETURN ON INVESTMENT:

Average cash flow = cash flows/10 = 12955.8/ 10 = 1295.58 Investment = Investment/2 = 8125/2 = 4062.5

= 32% PROFITABLE INDEX:

PI = 7354.40/8125 = 0.9 Times

PROJECT 5
(Estimated budget Rs 1920lacks)

73

YEARS

PBDT

LESS DEP AS PER INCOME TAX 672 187 159 135 115 98 83 71 60 51 1631

PBT

(-)TAX 33% -191.46 -16.56 -7.33 3.56 13.13 12.80 21.61 21.71 16.13 22.07

PAT

ADD: DEP 672 187 159 135 115 98 83 71 60 51 1631

CFAT

CCFAT

1 2 3 4 5 6 7 8 9 10 TOTAL

91.8 136.8 136.8 145.8 154.8 136.8 148.5 136.8 108.9 117.9 1314.9

-580.2 -50.2 -22.2 10.8 39.8 38.8 65.5 65.8 48.9 66.9 -316.1

-388.73 -33.63 -14.87 7.23 26.66 25.99 43.88 44.08 32.76 44.82

283.26 153.36 144.13 142.24 141.67 123.99 126.88 115.08 92.76 95.82 1419.2 1

283.26 436.62 580.75 722.99 864.66 988.65 1115.53 1230.61 1323.37 1419.21

YEARS 1 2

CFAT 283.26 153.36

CCFAT 283.26 436.62

PV@13% PVCFAT 0.885 0.783

74

PV@20% 0.883 0.694

PVCFAT 236.05 106.50

250.67 120.11

3 4 5 6 7 8 9 10 TOTAL

144.13 142.24 141.67 123.99 126.88 115.08 92.76 95.82 1419.21

580.75 722.99 864.66 988.65 1115.53 1230.61 1323.37 1419.21

0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295

99.88 87.24 76.89 59.55 53.93 43.29 30.87 28.22 850.68

0.579 0.482 0.401 0.335 0.279 0.332 0.194 0.161

83.41 68.59 56.93 41.53 35.41 26.76 17.97 15.47 688.64

NET PRESENT VALUE: NPV = Present value of cash inflows - cash outflows (Investment) = 850.68 1920 = -1069.32 INTERNAL RATE OF RETURN:

= 13+ 850.68 1920/ (850.68-688.45)*(20-13) = 13+ (-1069.32) / (162.04)*(7) = 13+ - (46) = 33% RETURN ON INVESTMENT:

75

Average cash flow = cash flows/10 = 1419.21/ 10 = 141.92 Investment = Investment/2 = 1920/2 = 960

= 15% PROFITABLE INDEX:

PI = 850.68/1920 = 0.44 Times

76

CFBDAT: CASH FLOW BEFORE DEPRECIATION AND TAX DEP: DEPRECIATION CFBT: CASH FLOWS BEFORE TAX CFAT: CASH FLOW AFTER TAX PBP: PAY BACK PERIOD PV: PRESENT VALUE NPV: NET PRESENT VALUE PVCF: PRESENT VALUE OF CASH FLOW ARR: AVERAGE RATE OF RETURN ROI: RETURN ON INVESTMENT

77

CHAPTER VI FINDINGS AND SUGGESSIONS

FINDINGS
78

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, hard-working, well qualified efficient and knowledgeable workforce The following findings are obtained from the analysis of data 1. The first project i.e. is generating unequal cash flows for 10 years. The initial investment is Rs 5125lacks.

The discounted PBP is 4.2years. The investment will recover in 4 years and 2 months NPV and IRR are positive for the proposal. Then the required rate of return i.e. 21.56% The profitable index is 1.22 times > 1 Return on investment is 44%

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

The discounted PBP is 3.1years.The investment will recover in 3 years and 1 month NPV and IRR are positive for the proposal. Then the required rate of return i.e. 26.35% The profitable index 1.73times Return on investment is 63%

79

3. The third project i.e. generates is the unequal cash flows for 10 years. The initial investment is Rs 4125lacks.

NPV and IRR are negative for the proposal. The profitable index is 0.58 is not good Return on investment is 20%

4. The fourth project i.e. generates is the cash flows for 10 years. The initial investment is Rs 8125lacks. The discounted PBP is 5.7years.The investment will recover in 5 years and 7 months NPV is negative IRR is 9.54% Profitable index is 0.9 which is not good sign Return on investment is 32%

5. The fifth project i.e. generates is the unequal cash flows for 10 years. The initial investment is Rs 1920lacks.

NPV and IRR are negative for the proposal. The profitable index is 0.44 it is very least Return on investment is 15%

80

SUGGESTIONS
1. The first project in all contexts PBP, NVP, IRR, & PI are positive as its returns are positive, accept the project.

2. The second project PBP of 3.1 years, NPV, IRR, PI are indicating of positive signs therefore the project is accepted.

3. The third project NPV and IRR are negative for the proposal. The profitable index is 0.58 is not good it indicating negative values so the project is rejected.

4. The fourth project PBP is 5.7years. NPV is negative IRR is 9.54% Profitable index is 0.9 which is not good sign so that the project if may increase the NPV may get profits and accept the project.

5. The fifth project in the project all the values is negative and PI is also 0.44 it is very least so reject the project.

81

FINANCIAL STATEMENTS

OPERATING RESULTS (RS/LKS) 82

SL N O A

DESCRIPTION 2004-05 TURNOVER-BHEL -NON BHEL TOTAL TURNOVER CHANGES IN WIP CHANGES IN FG EXPORT INCENTIVES GROSS TURNOVER EXCISE DUTY 3046 171622 174668 2400 7295 4238 188601 19597 169004 98043 391 1513 363 100310 68694 23138 2866 3274 7938 2053 114 6565 2005-06 27697 239520 267217 3165 2338 3397 276117 23131 252986 146246 459 1758 1163 149626 103360 26390 3171 3894 8783 5595 -34 7500

ACTUALS 2006-07 61181 228310 289491 3975 -8827 1779 286418 22027 264391 151552 334 491 1743 154120 110271 30754 4007 4670 13752 -626 288 8351 2007-08 667 309568 310235 17781 4591 2283 334890 27236 307654 183845 790 1840 1394 187869 119785 36001 4039 6125 12848 1805 -1524 11746 2008-09 779 414037 414816 10637 4938 1112 431503 24537 406966 259592 978 1925 1347 263842 143124 58365 4560 6436 15402 142 -324 13913

GTO LESS ED DIRECT MATERIALS SUB CONTRACT PAYMENT POWER AND FUEL TRANSFER IN SERVICE

C D E

TOTAL OF C VALUE ADDED PERSONNEL PAYMENTS INDIRECT MATERIALS OTHER EXPENSES-BHEL OTHER EXPENSESNONBHEL PROVISIONS PROV.EXCH.VAR. LESS.MISC.INCOM

83

TOTAL OF E F GROSS MARGIN (PBIDT) DEPRECIATION DRE ON VRS G GROSS PROFIT (PBIT) INTEREST H PROFIT BEFOUR TAX OPERATING COST

32818 35876 2153 601 33122 1105 32017 136639

40299 63061 2194

44494 65777 2487

47548 72237 3321

70668 72456 3978

60867 -682 61549 201962

63290 -2300 65590 221227

68916 -5870 74786 234377

68478 -6826 75304 338382

BALANCE SHEET (RS/LKS)

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DESCRIPTION 2004-05 RESOURCES: FUNDS FROM CORP.OFFICE RESERVES & SURPULS INTER UNIT BALANCE(NET) DEFERRED CREDIT LOANS TOTAL UTILISATION OF FUNDS FIXED ASSETS GROSS BLOCK OP BAL. ADDITIONS DELETIONS CL BALANCE LESS CUM EDPRECIATION NET BLOCK CAPTIAL IN WIP INTANGIBLE ASSETS TOTAL (A) 42455 33559 8896 2509 77 11482 46300 35700 10600 5879 63 16542 38519 3936 42455 3845 87535 108341 3252 133675 (49905) 513 3252 181157 (77122) 1054 2005-06

ACTUALS 2006-07 2007-08 2008-09

3252 212474 (129311) 607

6504 241734 (131467 ) 587

6504 271259 (173296) 2566

87022

117358

107033

46115 4153

46300 4823

51123 11991

50268 38021 12247 7563 19 19829

51123 41214 9909 5404 1667 16980

63114 45415 17699 10139 1930 29768

85

WORKING CAPITAL CURRENT ASSETS INVENTORIES BOOK DEBTS CASH /BANK BALANCES LOANS & ADVANCES INTER UNIT BALANCES(NET) SUB TOTAL (B) 192697 235062 276062 351150 453597 63734 112238 2094 14631 75016 135322 4643 20081 81476 177301 12 17273 111466 215291 14 24379 141190 287414 15 24978

CURRENT LIABILITIES ADVANCES FROMCUSTOMER SUNDRY CREDITORS OYHER LIABILITIES PROVISIONS SUB TOTAL (C) NET WORKING CAPITAL(B)-(C) DEFERRED REV.EXPENDITUR TOTAL CAPITAL EMPLOYED(EXCL IU) 87535 85026 108404 102525 87022 79459 113390 107986 107033 96894 116644 76053 143200 91862 208869 67193 254740 96410 376332 77265 70840 24225 4091 17488 76754 39495 3800 23151 104813 46452 3093 54511 131961 54586 3034 65151 225986 58078 2910 89358

86

YEAR END INVENTORY (RS/LKS)

DESCRIPTION 2004-05 MATERIAL INVENTORY RAW MATL & COMP INDIRECT MATERIALS MATERIAL IN TRANSIT TRANSFER IN TRANSIT MATLS WITH FABRICATORS SCRAP & OTHERS TOTAL OF MATERIAL INVENTORY PRODUCTION INVENTORY WORK IN PROGRESS FINISHED GOODS TOTAL OF PRODUCTION INVENTORY TOTAL INVENTORY TURNOVER NO OF DAYS OF TURNOVER 36662 42165 27592 33328 16727 1187 4719 1806 3045 108 19656 1286 5038 2107 4963 278 2005-06

ACTUALS 2006-07 2007-08 2008-09

21772 1546 9198 3379 7968 300 44163

25459 1987 14325 4163 5851 490 52275

31900 2400 18100 6400 7100 400 66300

25983 10679

29148 13017

33123 4190 37313

50904 8781 59685

61500 13700 75200

64254 174668 134

75493 267217 103

81476 289491 103

111960 310235 132

141500 414816 125

87

STATEMENTS

Latest Quarterly/Half yearly As On(Months) Sales of Products/Services Other Income Total Income Total Expenses OPBDIT Interest Depreciation Exceptional & Extraordinary Items Prior Period Adjustments Provision for Tax After Tax Profit Equity Capital Reserves 31-Mar-2010(3) 135591.00 2079.80 137670.80 110718.40 26952.40 178.00 1646.90 0.00 0.00 9887.20 19095.80 4895.20 0.00 31-Mar-2009(3) 105400.70 1971.90 107372.60 88437.90 18934.70 80.90 1008.30 0.00 0.00 7470.60 13474.70 4895.20 0.00

Detailed Quarterly % Change 28.64 5.47 28.22 25.19 42.34 120.02 63.33 --32.35 41.72 0.00 --

Income Statement

88

31-Mar-09(12) Profit / Loss A/C Net Sales (OI) Material Cost Increase Decrease Inventories Personnel Expenses Manufacturing Expenses Gross Profit Administration Selling and Distribution Expenses EBITDA Depreciation Depletion and Amortisation EBIT Interest Expense Other Income Pretax Income Provision for Tax Extra Ordinary and Prior Period Items Net Net Profit Adjusted Net Profit Rs mn 262123.30 155874.30 -11515.40 29836.80 24190.80 63736.80 26691.00 37045.80 3342.70 33703.10 307.10 14985.30 48381.30 17106.40 118.90 31393.80 31393.80 %OI 100.00 59.47 -4.39 11.38 9.23 24.32 10.18 14.13 1.28 12.86 0.12 5.72 18.46 6.53 0.05 11.98 11.98
89

31-Mar-08(12) Rs mn 193046.40 104006.90 -8272.60 26076.90 18204.70 53030.50 19838.70 33191.80 2972.10 30219.70 354.20 14457.80 44323.30 15710.50 -9.20 28603.60 28603.60 %OI 100.00 53.88 -4.29 13.51 9.43 27.47 10.28 17.19 1.54 15.65 0.18 7.49 22.96 8.14 -0.00 14.82 14.82

31-Mar-07(12) Rs mn 175147.60 85614.10 -1811.90 23689.50 21950.70 45705.20 10649.90 35055.30 2729.70 32325.60 433.30 5463.30 37355.60 13213.70 5.10 24147.00 24147.00 %OI 100.00 48.88 -1.03 13.53 12.53 26.10 6.08 20.01 1.56 18.46 0.25 3.12 21.33 7.54 0.00 13.79 13.79

Dividend - Preference Dividend - Equity

0.00 8321.80

0.00 3.17

0.00 7465.20

0.00 3.87

0.00 5996.60

0.00 3.42

90

BIBLIOGRAPHY

91

BIBLIOGRAPHY
BOOK/RESOURCE
FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT

AUTHOR
I.M.PANDEY KHAN & JAIN GUPTA & SHARMA PRASANNA CHANDRA

WEBSITES www.bhelhyderabad.com www.bhel.com

www.finance@bhel.co.in

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