Capital Expenditure Monitoring System At ALSTOM Shahabad

I.

Bearing induction heater & assembly tooling

1. Functional area 2. Budgeted cost 3. Actual cost 4. Life of assets 5. Depreciation method 6. % of depreciation 7. Cost savings in life time 8. Description :10%

: pulveriser : 2077210 : 1881762 : 10 years :life based depreciation

:45000 :1 labour @125Pday*30days* 12months*10years

9. % in savings from machine 10.Expected revenue generation

:24% :100000 tonns during life time rate PT 22.5 rs revenue is rs 100000*22.5=2250000

11.Estimated return of capital On investment

:6 years

1. calculation of cost savings & payback period

Cash outlay (investment) Payback period= Cash inflow (savings)

DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA

Capital Expenditure Monitoring System At ALSTOM Shahabad

Cash inflow (savings) particulars Cost savings in life time Less depreciation (10% on budgeted cost 2077210*10/100) EBIT Less tax 30% (242279*30/100) EAT Add depreciation 169595 207721 242279 72684 Amount 450000 207721

Cash inflow

377316

2077210
Payback period=

377316
= 5.5 Years Decision criteria It will take 5 year 6 month to recover the Rs. 20,77,210 investment. The firms expects the investment to be recorded in 6 years. Which is greater than calculated payback period.
DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA 2

Capital Expenditure Monitoring System At ALSTOM Shahabad

So the proposal for investment in bearing induction heater and assembly tooling was accepted. 2. Accounting rate of return.
ARR =

Annual profit after tax *100 Net Investment

=

169595 2077210
=

*100

2
*100

169595 1038605

= Decision criteria

16.32

The accounting rate of return is greater than the prevending market rate of return (8.50 %). The investment should be accepted.

3. Calculation of internal rate of return IRR = A + C-O C-D A Lower rate 10 B Higher rate 14 6.1446 5.2161 B-A

C Present value of cashinflow at lower rate 377316 * 6.1446 =2318456 D Present value of cashinflow at higher rate
DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA 3

Capital Expenditure Monitoring System At ALSTOM Shahabad

377316 * 5.2161 =1968118 O Outflow(price of machine) 2077210(budgeted cost) IRR =10+2318456-2077210 (14-10) 2318456-1968118 =10+241246 * 4 350338 =10+0.68 * 4 =10+2.75 =12.75% Discision criteria The internal rate of return is greater then the firm required rate of return of 10% this investment should be accepted.

DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA

Capital Expenditure Monitoring System At ALSTOM Shahabad

II. 1. 2. 3. 4. 5. 6. 7. 8.

EOT crane remote conversion Functional area Budgeted cost Actual cost Life of assets Depreciation method % of depreciation Cost savings in life time Description : Foundary : 1035534 : 1881762 : 10 Years : Life based depreciation : 10% : 306000 : One unskilled labour at 85 per day * 30 * 12 * 10

9. 10.

% in savings from machin

: 39%

Expected revenue generation : 40000 tonns during life time rate pt

rs 22.5 Revenue is Rs 40000 * 22.5 = 900000 11. Estimated return of capital On investment : 8 Years

1.

Cost savings & payback period payback period = cash outlay ( investment ) Annual cashinflow ( savings )

DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA

Capital Expenditure Monitoring System At ALSTOM Shahabad

Cashinflow ( savings )

Particulars Amt

Cost savings in life time Less Depreciation (10% on budgeted cost 1035534*10/100) EBIT Less Tax 30% on EBIT EAT Add depreciation Cashinflow

234000 103553

202447 60734

141713 103553

245266

Payback period = 1035534 2452566

= 4.22

Decision criteria It will take 4 year 2 month and days to recover the Rs 1035534 investment. The firms expects the investment to be recorded in 8 years. Which is greater than calculated payback period.

DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA

Capital Expenditure Monitoring System At ALSTOM Shahabad

So the proposal for investment in EOT crane remote convertion was accepted.

1. Accounting rate of return.

ARR =

Annual profit after tax *100 Net Investment 2

141713 1035534
=

*100

2
*100

141713 517767

= Decision criteria

27.37

The accounting rate of return is greater than the prevending market rate of return (8.50 %). The investment should be accepted.

2. Calculation of internal rate of return IRR = A + C-O C-D A Lower rate 17 B Higher rate 20 4.6586 4.1925 B-A

C Present value of cashinflow at lower rate

DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA 7

Capital Expenditure Monitoring System At ALSTOM Shahabad

245266*4.6586=1142596 D Present value of cashinflow at higher rate 245266*4.1925=1028278 O Outflow(price of machine) 1035534(budgeted cost) IRR =17+1142596-1035534 (20-17) 1142596-1028278 =17+107062 *3 114318 =17+0.93*3 =17+2.80 =19.80% Discision criteria The internal rate of return is greater then the firm required rate of return of 14% this investment should be accepted.

DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA

Capital Expenditure Monitoring System At ALSTOM Shahabad

III.

Service transformers 100 KVA and 50 KVA

1. Functional area 2. Budgeted cost 3. Actual cost 4. Life of assets 5. Depreciation method 6. % of depreciation : 20%

: foundry : 413861 : 331892 : 5 years : life based depreciation

7. Cost savings in life time :78000 8. Description :300 units pm @ 6.5*12*5 :24% : 6000 low voltage domestic units during

9. % in savings from machine 10.Expected revenue generation life time rate

P unit 6.5 = 39000 11.Estimated return of capital On investment : 3 years

2.

Cost savings & payback period

payback period = cash outlay ( investment ) Annual cashinflow ( savings )

DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA

Capital Expenditure Monitoring System At ALSTOM Shahabad

Cash inflow (savings) particulars Cost savings in life time Less depreciation (20% on budgeted cost 413861*20/100) 34228 EBIT Less tax 30% (34228*30/100) 23960 82772 EAT Add depreciation 106732 10268 Amount 117000 82772

Cash inflow

Payback period = 413861 106732

= 3.87

Decision criteria It will take 3 year 8 month and days to recover the Rs 413861 investment. The firms expects the investment to be recorded in 3 years. Which is greater than calculated payback period.

DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA

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Capital Expenditure Monitoring System At ALSTOM Shahabad

So the proposal for investment in service transformers 100KVA and 50 KVA Was rejected.

1. Accounting rate of return.

ARR =

Annual profit after tax *100 Net Investment 2

23960 413861
=

*100

2
*100

23960 206930

= Decision criteria

11.58

The accounting rate of return is greater than the prevending market rate of return (8.50 %). The investment should be accepted.

2. Calculation of internal rate of return IRR = A + C-O C-D A Lower rate 8 B Higher rate 11 3.9927 3.6959
11

B-A

DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA

Capital Expenditure Monitoring System At ALSTOM Shahabad

C Present value of cashinflow at lower rate 106732*3.9927=426149 D Present value of cashinflow at higher rate 106732*3.6959=394471 O Outflow(price of machine) 413861(budgeted cost) IRR =8+426149-413861 (11-8) 426149-394471 =8+ 12288 *3 31678 =8+0.387*3 =8+1.16 =9.16% Discision criteria The internal rate of return is greater then the firm required rate of return of 8% this investment should be accepted.

DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA

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Capital Expenditure Monitoring System At ALSTOM Shahabad

Ratio analysis of capital items 1. Return on capital employed

Return on capital employed =

Profit

*100

Capital employed

Capital employed = NFA+(CA-CL)

2009-10

CE = 314.49+(242.05-221.73) = 314.49+20.32 = 334.81

2010-11

CE = 398.05+(2401.34-2247.60) = 398.05+153.74 = 551.79

2011-12

CE = 468.62+(2464.98-2249.95) = 468.62+215.03 = 683.65

Year

Net profit (amount in Rs.crores)

Capital employed (amount in Rs.crores)

Ratio

2009-10 2010-11 2011-12

34.61 36.91 57.79

334.81 551.79 683.65

10.33 6.68 8.45

13

DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA

Capital Expenditure Monitoring System At ALSTOM Shahabad

800 700 600 500 400 300 200 100 0 2009-10 2010-11 2011-12 NET PROFIT (AMOUNT IN RS.CRORES) CAPITAL EMPLOYED(AMOUNT IN RS.CRORES) RATIO

2. Total assets turnover ratio This ratio shows the firms ability in generating sale from all finical resources committed to total assets. This ratio indicates the number of time total asset are being turned over in a year. Total asset turnover ratio = net sale / total asset Net sales (Amount in Rs.crores) 2041.37 1575.31 Total asset (Amount in Rs. Crores) 496.14 286.44 298.45

Year

Ratio

2009-10 2010-2011

4.11 5.49 6.26

2011-12 1868.61 Source: Annual Report

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Capital Expenditure Monitoring System At ALSTOM Shahabad

2500

2000

1500 Net sales (Amount in Rs.crores) Rs.crores) 1000 Ratio

500

0 2009-10 2010-11 2011-12

3.Fixed asset turnover ratio: This ratio measure the companys ability to generate sale revenue in relation to the size of the asset investment. An increase In fixed asset figure may result from the replacement of an asset at an increase price or the purchase intended to increase production capacity. Fixed asset turnover ratio = sale / net fixed asset Net sales (amount in Rs. Corers) 2041.37 1575.31 1868.61 Fixed asset (amount in Rs. Corers) 341.49 398.05 468.62 Ratio of an addition asset

Year

2009-10 010-121 2011-12 Source: annual report

5.97 3.95 3.98

DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA

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Capital Expenditure Monitoring System At ALSTOM Shahabad

2500

2000

1500

net sales (Amount in Rs.Cr0res) fixed asset (Amount in Rs.crores) Ratio

1000

500

0 2009-10 2010-11 2011-12

4. Net Profit ratio: Net profit ratio = Net profit *100 Net sales

Year

Net profit (amount in Rs. Corers) 34.61 36.91 57.79

Net sales (amount in Rs. Corers) 2041.37 1575.31 1868.61

Ratio

2009-2010 2010-2011 2011-2012 100

80 60 40 20

1.69 2.34 3.09

East West North

0 DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

16

Capital Expenditure Monitoring System At ALSTOM Shahabad

2500

2000

1500 Net profit (Amount in Rs.crores) net sales (Amount in Rs. Crores 1000 ratio

500

0 2009-10 2010-11 2011-12

DEPT OF COMMERCE AND MANAGEMENT GOVT, COLLEGE GULBARGA

17