A Project Report on Investment Decision (Payback period & NPV) For

Submitted to-

Mr. C. Nagapawan (Coordinator, IMBA) & Mr. R. K. Das (Faculty, IMBA)

Submitted by-

Varsha Pandey (Roll no. - 33) Mitusha Kumari (Roll no. – 18) Meera Mishra (Roll no. - 17) Manisha Mishra (Roll no. - 15) Apurva Utkarsh (Roll no. - 03)

ACKNOWLEDGEMENT

We would like to avail the presentation of the project report on the

topic Investment decision by NPV and PAY BACK period method

of ENEL Ltd ,This report would have been impossible wuthout the

support and guidance that we received from various people at

different stages of the project. We were given an insight of all

practical aspects and learnt valuable things by making this project

report .

Our sincere thanks to our guide Mr. Raju Kumar Das

whose excellent guidance, encouragement and patience has made

possible the successful completion of this project.

2

Date-

CERTIFICATE

This is to certify that Ms. Varsha Pandey, Ms. Mitusha, Ms. Meera Mishra, Ms. Manisha Mishra and Mr. Apurva Utkarsh have sucessfully completed and submitted the project report on the topic Inevestment Decision by NPV and Payback Period Method for Enel Ltd. under the guidance of the undersigned.

Mr. C. Nagapawan Mr. R.K. Das

(Coordinator, IMBA) (Faculty, IMBA)

3

Index: Opening of the project… 5

Foreign Direct Investment… 6

FDI in India… 7

Areas of investment… 9

Investing Company’s Profile (Enel)… 10

Why Enel…?? 13

Location… 15

Why Jharkhand…?? 16

Numerical assessment of the project… 19

Conclusion & recommendation… 23

Bibliography… 24

4

Opening…

Every economy has its own characteristics. Indian

economy also has. Some of its characteristics are-

Low level of income

Poor capital formation

Low level of technology

Unexploited natural resources

Poor infrastructure

These issues can be addressed in a number of ways. One of which is Foreign Direct Investment or FDI.

5

Foreign Direct Investment- FDI refers to capital inflows from abroad that invest in the production capacity of the economy. It is a more preferred form of external finance. It benefits an economy by-

triggering technology spillovers,

assisting human capital formation,

contributing to international trade integration and particularly exports,

helping create a more competitive business environment,

enhancing enterprise development,

increasing total factor productivity and,

more generally, improving the efficiency of resource use.

6

FDI in India- Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country.

India has continually sought to attract FDI from the world’s major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. FDI are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining industries.

A number of projects have been announced in areas such as electricity generation, distribution

7

and transmission, as well as the development of roads and highways, with opportunities for foreign investors.

But even today a lot of natural resources are untapped and a lot is needed to be done for a rapid capital formation. Thus FDI is one of the most sought after measures to tackle these issues.

Areas of Investment-

8

Areas that need special attention are health care, infrastructure, electricity generation, real estate, etc. We have considered electricity generation or energy sector as our area of interest for this project.

Investing Company

9

Profile- Enel (Ente Nazionale per l'Energia eLettrica) is an Italian energy provider, the third-largest in Europe by market capitalization. Formerly a state-owned monopoly, it is now partially privatized with Italian government control: the largest shareholders are the Italian Ministry of Economy & Finance (13.9%) and the state-run bank Cassa Depositi e Prestiti (17.4%).

Industry- Energy

Founded- 27 November 1962

Headquarter- Rome, Italy

Areas served- Italy, Spain, France, Belgium, Greece, Bulgaria, Slovakia, Romania, Russia, USA, Chile, Nicargua, El Salvador, Panama, Costa Rica and Brazil

Products- Natural Gas and Electricity production & distribution

10

Revenue- €73.38 billion (2010)

Operating income- €11.26 billion (2010)

Profit- €5.390 billion (2010)

Total assets- €168.05 billion (end 2010)

Total equity- €53.55 billion (end 2010)

In a nutshell, Enel is Italy’s largest power company, and Europe’s second listed utility by installed capacity. It is an integrated player, active in the power

11

and gas sectors. Enel operates in more than 40 countries worldwide, has around 95,000 MW of net installed capacity and sells power and gas to more than 61 million customers.

Why Enel…??

It is clear from the chart below that the proceeds of the company has increased over years and so has happened with the profit which rose from € 3,036 million in 2006 to € 3895 million in 2007 to € 3977 million in 2008 to € 5293 million in 2009.

According to Forbes, the net profit of Enel stood around € 5390 million at the end of 2010.

12

All figures are in million Euros

The company has also been able to pay dividends to its shareholders every year. Enel has got plenty of experience in the international market and has been doing well.

It can be concluded that Enel is in sound position to start its operation in India and invest on a new project.

13

Location- While selecting the location for a project few things are essentially considered- availability of raw materials, cheap and plenty of man power, transportation facilities, connectivity with the market, government policies, etc. Keeping these points in mind the best suited place for Enel to invest is Jharkhand.

Why Jharkhand-14

Jharkhand is gifted with a variety of natural endowments. It has a great natural storage of coal and minerals including iron ore, mica, uranium, etc. . Most of the electricity generation potential are untapped. There is immense potential for setting up of Thermal, Hydel, Geothermal, Atomic, Methane and Gas based new power plants in Jharkhand.

All fig. in MW

The installed capacity of power in Jharkhand is 2,590 MW. This includes 420 MW (Tenughat Thermal

15

Power Station), 840 MW (Patratu Thermal Power Station), 130 MW (Sikkidri Hydel) and 1,200 MW (DVC, Thermal/Hydel). The prospects of capacity addition in both the thermal and hydel sectors are 4,736 MW. This includes 686 MW hydel generations.

Jharkhand also has a big cheap man force. Besides it is also well connected with the major cities in India via roads, railways and aviation.

Roads : The total length of roads in the State is 4,311 km. This inlcudes 1,500 km national highways and 2,711 km state highways.

Railways : The State has a well-developed railway system. Ranchi, Bokaro, Dhanbad, Jamshedpur are some of the major railway stations.

Aviation : Ranchi is connected with Delhi, Patna and Mumbai. Jamshedpur, Bokaro, Giridih, Deoghar, Hazaribagh, Daltonganj and Noamundi have air strips.

The development of power sector is also given highest priority in the stateʹseconomic planning to bridge the gap between demand and supply.

16

For how long, how much and forecast-

Considering the need and scope of the energy sector and also considering the investment potential of Enel, it is recommended to invest Rs. 100 cr. on electricity generation project in Jharkhand for a period of 5 years in initial stage.

After completion of 5 years the future course of operation will be decided.

Considering the potential in the power sector the income forecast for the project after depreciation and tax for a period of 5 years is Rs. 20 cr. , Rs. 40 cr. , Rs. 30 cr. , Rs. 40 cr. and Rs. 60 cr. .

17

Payback period of the project- Payback period refers to the period of time required for the return on an investment to “repay” the sum of the original investment.

Year Cash inflow Cumulative cash inflow

01 20,oo,oo,000 20,00,00,00002 40,00,00,000 60,00,00,00003 30,00,00,000 90,00,00,00004 40,00,00,000 1,30,00,00,00005 60,00,00,000 1,90,00,00,000

Payback period= (1,00,00,00,000-90,00,00,ooo) +3 40,oo,00,000

= 3.25 years

Net present value of the project-

18

Net Present Value is one of the discounted cash flow techniques that explicitly recognizes the time value of money.

The NPV method discounts inflows and outflows to their present value at the appropriate cost of capital and sets the present value of cash flows against the present value of outflows. Thus, the net present value is obtained by subtracting the present value of cash outflows.

19

If the required rate of return is assumed to be 20% by the company then

Year Cash inflow (Rs.) Discounting factor PV of cash inflow (Rs.)

1 20,00,00,000 0.893 16,66,00,000

2 40,00,00,000 0.694 27,76,00,000

3 30,00,00,000 0.579 17,37,00,000

4 40,00,00,000 0.482 19,82,00,000

5 60,00,00,000 0.402 24,12,00,000

Total 1,05,73,00,000

Net Present Value= Cash inflow – Cash outflowBy formula:NPV= Rs. (1,05,73,00,000 – 1,00,00,00,000)

= Rs.5,73,00,000

COMMENT: We can see that NPV of the project is positive. Thus, this project should be considered by Enel.

Conclusion and Recommendation-

20

The calculations show that the NPV of the project is more than the investment done and the company will get the repayment of the investment made in 3.25 years. The return generated after the payback period will obviously be surplus for the company. After completion of 5 years, the company will have to decide whether it wants to go ahead with the project for some more time or not depending on the then situations. If the company decides to go ahead after 5 years, it will not have to spend much on getting the fixed assets. The surplus return generated at the end of 5 years will itself be able to meet the then requirements (except in some odd circumstances). These facts altogether suggest that there is a favorable condition for investment in this project.

Thus the project is recommended to be accepted by Enel.

BIBLIOGRAPHY

21

Text book of Financial Management by M. Y. Khan

Website of Dept. of Industries, Govt. of Jharkhand

Website of Enel Energy Ltd.

Website of Forbes

22