MBA ACaDEMIC PROJECT

CHAPTER – I

INTRODUCTION

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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 manager’s 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.

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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 long-

term 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.”

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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:4

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

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http://WWW.BHEL.COM/

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.

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.

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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.

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CHAPTER – II

COMPANY PROFILE

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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 company’s 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 Company’s

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 services—efficiently and at competitive prices. The high level of

quality & reliability of its products is due to the emphasis on design, engineering and

manufacturing to international standards by acquiring and adapting some of the best technologies

from leading companies in the world, together with technologies developed in its own R&D

centers.

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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 lion’s share in

BHEL Corporation’s 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 MNC’s like M/S

General Electric, USA, and M/S Nuovo pig none, etc.

HISTORY OF BHEL

BHARAT HEAVY ELETRICALS LIMITED (BHEL) is one of the pioneers in

engineering industries in the world. The vital role played by the BHEL today in the country is

the mark of its continuous effects to improve the service in the nation by consultancy,

manufacturing and offering services in Power section.

The success story of BHEL how ever goes back to 1956 when its first plant was set up

in BHOPAL. Three major plants in Haridwar, Hyderabad and Tiruchirapally followed this.

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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.

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 employee’s zeal to excel supported by the company’s constant encouragement

has also resulted in 52 of its employee’s winning a sizeable number of 40 prestigious

Prime Minister’s Shram Awards.

BHEL employees being conferred one of the country’s 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.

EEPC’s 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.

BHEL’s power generating sets achieved record generation in first nine months of 2006-

07. 87% of the coal based sets and 100% of nuclear sets added in the country during the year

were of BHEL make.

BHEL commissions India’s 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

handling plants, Centrifugal compressors, Electrical machines? Pumps, Valves, Seamless steel

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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:-

BHEL is a major contributor to the oil and gas sector industry in the country. BHEL’s

product range include Deep Drilling Oil Rigs, Mobile Rigs, Work Over Rigs, Well Heads and

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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

Pumps

Pulverizers

Switchgears

Solar Water Heating Systems

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Oil Rigs

Electrics for Urban Transportation System

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

world’s 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.

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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,

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.

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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, anit-

surge control systems, instrumentation and controls and process gas and cooling water piping

for supporting the compressor for continuous and trouble free operation.

Compressors are made as per API Standards/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

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 BHEL’S

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-the-

art mills required for the Indian market and are supplied as Industrial boilers as-well-as Utility

boilers of 60 MW, 110 MW, 120 MW, 210 MW, 250 MW & 500 MW capacities.

To meet the requirement of very high ash content coal with high moisture, BHEL in

collaboration with M/s Stein Industry, France of the ALSTHOM group, manufactures Ball

Tube Mills for Tower-type Boiler as-well-as conventional Boiler. These are horizontal mills

that grind coal by impact and attrition. They do not lose any of their grinding characteristics

with time, and provide constant fineness throughout the service life of their wear parts. They

are the only mills truly adapted to both, very abrasive high -ash coals and very low volatile

coals which require very fine grinding.

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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.

Tram Cars.

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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 company’s growth. Confidence

in providing increased value for this money through International Standards of Product,

Quality, Performance and superior customer services.

TECHNOLOGY

To achieve Technology excellence in operations by development of Indigenous

Technologies to and efficient absorption and adaptation of Imported Technologies to

suit Business needs and priorities and provide a competitive advantage of the company.

IMAGE

To fulfill the expectation which stock holders like Government as own,

employees, customers and the country at large have from BHEL.

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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

The strength, Weaknesses, Opportunities and Threats which are being experienced by

BHEL as a growing concern have been summarized up in the following lines.

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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.

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.

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OPPORTUNITIES

Growing Power Sector Machinery.

Liberalization has opened up the market.

Navratna company status.

Dominant player in Domestic Market.

Expert potential growing.

THREATS

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

MNC’s taking away good employees with attractive packages.

Government taxation policy – against manufacturing sector increases the price of the

product.

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CHAPTER – III

THEORITICAL ASPECTS OF

CAPITAL BUDGETING

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CAPITAL BUDGETING

Business firms have scarce resources that must be allocated among competitive uses.

The financial management provides a framework for firms to take these decisions widely.

The investments decision includes not only those that create revenues and profits but

also those that reduce cost. So,the investments decisions and the decisions relating to assets

composition of the firm.

A capital expenditure, from the accounting point of view, is an expenditure that is

shown as an asset on the balance sheet. This asset, expect in the case of a one-depreciable asset

like land , is depreciated over its life in accounting the classification of an expenditure as capital

or revenue expenditure is governed by a certain conventions, by some provisions of law, and by

the management’s desire to enhance and depress reported profits. Often, outlays on R&D,

major advertising campaign, and reconditioning of plant and machinery may be treated as

revenue expenditure for accounting purposes, been though they are expected to generate a

stream of benefits in future and therefore, quality or being capital expenditure.

CAPITAL BUDGETING FEATURES

1. They have long-term consequences

2. They often involve substantial outlay.

3. They may be difficult or expensive.

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FEATURES

1. It involves exchange of current funds for the benefits to be achieved in future.

2. Future benefits are expected to be realized over a series of years.

3. There is relatively high degree of risk.

4. They are invariable decisions.

5. They have long-term and significant effect on profitability of the concern.

6. They generally involve huge funds.

IMPORTANCE

Capital budgeting is of a paramount importance in financial decision-making. Capital

budgeting decision affects the profitability of the firm. They also have a bearing on the

competitive position of the enterprise. Capital budgeting decisions determine the future destiny

of the company.

An opportunity investment decision can yield spectacular returns where as an ill-advised

and incorrect investment decision can endanger the very survival even of the large sized

firms.

A capital expenditure decisions has its effect over a long-term time span and inevitably

affects the company’s future cost structure.

Capital investment decisions are not easily reversible, without much financial loss to the

firm.

Capital investment involves cost and the majority of the firms have scares capital

resources

Capital investment decisions are of national importance because of it determines

employment, economic activities and economic growth.

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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

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.

38

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.

39

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 cash-

flows positive as well as negative that are expected to occur over the life of the projects.

The generally formula of NPV is:-

n

NPV of project = ∑ Ct ----- Initial investment

t=1(1+rt)t

Where Ct = Cash flow at the end of year t

Rt = Discounted rate for year t

40

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

If NPV< ZERO, REJECT

In case of mutually, exclusive projects, the various proposals would be ranked in order to

descending order. The proposal with higher NPV is to be accepted.

41

MERITS:

1) It recognizes the time value of money.

2) It is sound method of appraisal as it considers the total benefits arising out of the

proposal over its lifetime.

3) Changing discount rate can be built in to the NPV calculation by altering the

denominators. This rate normally changes because longer the time span, lower the value

of money and higher, the discount rate

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

DEMERITS:

A. It is difficult to calculate to understand

B. The present value method involves the calculation of required rate of return to

discount the cash flows, which present serious problems.

C. It is an absolute measure.

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

effective lives.

42

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.

PBP=INITIAL INVESTMENT

AVERAGE CASH FLOWS

43

Step 3

Look for the factor in the present value annuity table in the year column until you arrive at

figure until you closest to the fake PBP

Step 4

Note the corresponding percentage.

Step 5

Calculate NPV at that percentage

Step 6

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

calculate NPV

Step 7

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

negative NPV.

Step 8

Actual IRR can be calculated by using the following formula:

IRR=

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

LR)P.V of cash inflows at LR-P.V of cash inflows at HR

Where:

R = interest rate,

LR = lower rate

HR = Higher rate

44

ACCEPT OR REJECTION CRITERION:

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

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

MERITS:

1) It recognizes the time value of money.

2) It considers all cash flows occurring over the entire life of the projects to

calculate its return.

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

DEMERITS:

1) It gives misleading and inconsistent results when the NPV of a project

does not decline with discount rates.

2) It also fails to indicate a correct choice between mutually exclusive projects

under certain situations.

45

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

2) Since the present value of cash inflows is divided by initial cash outflows it is a

relative measure of the projects profitability.

DEMERITS:

1) It is difficult to understand

2) It involves more computation than traditional methods.

46

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.

47

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 PBP the faster the uncertainty associated

with the project is resolved and vice versa.

48


The payback period method can be used as a decision criterion to accept or reject

investment proposals. If a single investment is being considered, if the annual pay back period

is less than the predetermined payback period the project will be accepted, if not it would be

rejected.

When the mutually exclusive projects consideration they may be ranked according to

the length of the payback period. The project with shortest pay back may be assigned

MERITS:

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

2) It is to calculate and simple to understand.

3) It is bases on the cash flow analysis.

DEMERITS:

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

2) It completely ignores time value of money.

In case the cash flow 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.

49

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.

ARR

AVERAGE ANNUAL PROFIT AFTER

TAX * 100

AVERAGE INVESTMENTS

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


The actual average rate or return is compared with pre-determined or minimum required

rate of return or cut off rate. A project would qualify to be accepted, if the actual rate of return

is higher than the minimum desired average of return.

It more than one alternative proposal are under consideration, the average rate of return

may be arranged in descending order of magnitude starting with the proposal with the highest

average rate of return.

50

CHAPTER – IV

CAPITAL BUDGETING IN BHEL

51

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

52

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

of the future stream of net cash benefits expected from the proposal is greater than the initial

cash outlay required to implement the proposal.

53

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.

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.

54

DEBENTURES:-

For large publicity traded firms, debentures are viable alternative to term loans. Akin to

promissory notes, debentures are instruments for raising long-term debt. Debentures holders are

the creditors of the company. The obligation of the company towards its debenture holder is

similar to that of borrower who promises to pay interest and principal at specified times.

TERM LOANS:-

Term loans for more than a year maturity. It is generally available for a period of 10

years. Interest on term loans is tax deductible. They are obtained from banks and specially

created financial institutions like IFCI, ICICI and IDBI etc the purpose of term lands is mostly

to finance the company’s capital expenditure. They are generally obtained of financing large

expansion, modernization or diversification projects. Hence this method of financing is also

called project financing. This is the most widely used source of financing.

55

CHAPTER –V

DATA ANALASIS

AND

INTERPRETATION

56

PROBLEM

PROJECTS EVALUTED

PROJECTS Project1 Project2 Project3 Project4 Project5

Cost of Investment(Lakhs)

5125 10250 4125 8125 1920

PBDTYear

1

Year

2

Year

3

Year

4

Year

5

Year

6

Year

7

Year

8

Year

9

Year

10TOTAL

PROJECT1

1020 1520 1520 1620 1720 1520 1650 1520 1210 1310 14610

PROJECT2

3060 4560 4560 4860 5160 4560 4950 4560 3630 3930 43830

PROJECT3

306 456 456 486 516 456 495 456 363 393 4380

PROJECT4

1122 1672 1672 1782 1892 1672 1815 1672 1331 1441 16070

PROJECT5

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%

57

Present value factor 13%

SOLUTION

PROJECT 1

(Estimated budget Rs 5125lacks)

YEARS PBDT

LESS DEP AS PER

INCOME TAX

PBT(-)TAX

33%PAT

ADD: DEP

CFAT CCFAT

1 1020 1794 -774 -255 -519 1794 1276 1276

2 1520 500 1020 337 683 500 1183 2459

3 1520 425 1095 361 734 425 1159 3618

4 1620 361 1259 415 844 361 1205 4823

5 1720 307 1413 466 947 307 1254 6077

6 1520 261 1259 415 844 261 1105 7182

7 1650 222 1428 471 957 222 1179 8361

8 1520 188 1332 439 893 188 1081 9442

9 1210 160 1050 346 704 160 864 10306

10 1310 136 1174 387 787 136 923 11229

TOTAL 14610 4354 10256 3382 6874 4354 11229

58

YEARS CFAT CCFAT PV@13% PVCFAT PV@20% PVCFAT

1 1276 1276 0.885 1129.26 0.883 1126.70

2 1183 2459 0.783 926.28 0.694 821

3 1159 3618 0.693 803 0.579 671.06

4 1205 4823 0.613 738.66 0.482 580.81

5 1254 6077 0.543 680.92 0.401 502.85

6 1105 7182 0.480 530.4 0.335 370.17

7 1179 8361 0.425 501 0.279 328.94

8 1081 9442 0.376 406.45 0.332 358.89

9 864 10306 0.333 287.71 0.194 167.61

10 923 11229 0.295 272.28 0.161 148.60

TOTAL 11229 6276.25 5076.66

PAY BACK PERIOD:

= 4+ 5125-4823/1254

= 4.2 months

NET PRESENT VALUE:

NPV = Present value of cash inflows - cash outflows (Investment)

= 6276.25 – 5125

= 1151.25

59

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

= 2562.5

= 44%

60

PROFITABLE INDEX:

Total present value of cash flow =6276.25

Total Investment =5125

= 1.22 Times

61

PROJECT 2


YEARS PBDT

LESS DEP AS PER

INCOME TAX

PBT(-)TAX

33%PAT

ADD:

DEPCFAT CCFAT

1 3060 3588 -528 -174.24 -353.76 3588 3234.24 3234.24

2 4560 999 3561 1175.13 2385.87 999 3384.87 6619.11

3 4560 850 3710 1224.3 2485.7 850 3335.7 9954.81

4 4860 722 4138 1365.54 2772.46 722 3494.46 13449.27

5 5160 613 4547 1500.51 3046.49 613 3659.49 17108.76

6 4560 521 4039 1332.87 2706.13 521 3227.13 20335.89

7 4950 444 4506 1486.98 3019.02 444 3463.02 23798.91

8 4560 377 4183 1380.39 2802.61 377 3179.61 26978.52

9 3630 320 3310 1092.3 2217.7 320 2537.7 29516.22

10 1310 272 3658 1207.14 2450.86 272 2722.86 32239.08

TOTAL 43830 8706 35124 8706 32239.08

62


1 3234.24 3234.24 0.885 2862.16 0.883 2695.20

2 3384.87 6619.11 0.783 2650.85 0.694 2350.60

3 3335.7 9954.81 0.693 2311.80 0.579 1930.38

4 3494.46 13449.27 0.613 2143.22 0.482 1685.21

5 3659.49 17108.76 0.543 1986.22 0.401 1470.66

6 3227.13 20335.89 0.480 1550.05 0.335 1080.76

7 3463.02 23798.91 0.425 1471.99 0.279 966.46

8 3179.61 26978.52 0.376 1196.04 0.332 739.47

9 2537.7 29516.22 0.333 844.76 0.194 491.82

10 2722.86 32239.08 0.295 802.12 0.161 439.75

TOTAL 32239.08 17819.23 13850.35

PAY BACK PERIOD:

= 3+ 10250-9954.81/3494.46

= 3.1 months

NET PRESENT VALUE:


= 17819.23 – 10250

= 7569.23

63


= 13+ 17819.23- 10250/ (17819.23-13850.35)*(20-13)

= 13+7569.23 / (3968.88)*(7)

= 13+ 13.35

= 26. 35%



= 32239.08/ 10

= 3223.90


= 10250/2

= 5125

= 63%

PROFITABLE INDEX:

PI = 17819.23/1025

= 1.73 Times

64

PROJECT 3


YEARS PBDT

LESS DEP AS PER

INCOME TAX

PBT(-)TAX

33%PAT

ADD: DEP

CFAT CCFAT

1 306 1444 -1138 -375.54 -762.46 1444 681.54 681.54

2 456 402 54 17.82 36.18 402 438.18 1119.72

3 456 342 114 37.62 76.38 342 418.38 1538.1

4 486 291 195 64.35 130.65 291 421.65 1959.75

5 516 247 269 88.77 180.23 247 427.23 2386.98

6 456 210 246 81.18 164.82 210 374.82 2761.8

7 495 178 317 104.61 212.39 178 390.39 3152.19

8 456 152 304 100.32 203.68 152 355.68 3507.87

9 363 129 234 77.22 156.78 129 285.78 3793.65

10 393 109 284 93.72 190.28 109 299.28 4092.93

TOTAL 4383 3504 879 3504 4092.93


65

1 681.54 681.54 0.885 603.13 0.883 567.95

2 438.18 1119.72 0.783 343.16 0.694 304.29

3 418.38 1538.1 0.693 289.96 0.579 242.12

4 421.65 1959.75 0.613 258.60 0.482 203.34

5 427.23 2386.98 0.543 231.88 0.401 171.69

6 374.82 2761.8 0.480 180.03 0.335 125.53

7 390.39 3152.19 0.425 165.94 0.279 108.95

8 355.68 3507.87 0.376 133.79 0.332 82.72

9 285.78 3793.65 0.333 95.13 0.194 55.38

10 299.28 4092.93 0.295 88.16 0.161 48.33

TOTAL 4092.93 2389.80 1910.31

NET PRESENT VALUE:


= 2389.80 – 4125

= -1735.2


= 13+ 2389.80- 4125/ (2389.80-1910.31)*(20-13)

= 13+ (-1735.2) / (479.49)*(7)

= 13+ (-25. 3)

= 12.5%

66



= 4092.93/ 10

= 409.29


= 4125/2

= 2062.5

= 20%

PROFITABLE INDEX:

PI = 2389.80/4125

= 0.58 Times

67

PROJECT 4


YEARS PBDT

LESS DEP AS PER

INCOME TAX

PBT(-)TAX

33%PAT

ADD: DEP

CFAT CCFAT

1 1122 2844 -1722 -568.26 -1153.74 2844 1690.26 1690.26

2 1672 792 880 290.40 589.60 792 1381.60 3071.89

3 1672 673 999 329.67 669.33 673 1342.33 4414.22

4 1782 572 1210 399.30 810.70 572 1382.70 5796.92

5 1892 487 1405 463.65 941.35 487 1428.35 7225.27

6 1672 341 1331 439.23 891.77 341 1232.77 8458.04

7 1815 289 1526 503.58 1022.42 289 1311.42 9769.46

8 1672 246 1426 470.58 955.42 246 1201.42 10970.88

9 1331 209 1122 370.26 751.74 209 960.74 11931.62

10 1441 178 1263 416.79 846.21 178 1024.21 12955.80

TOTAL 16071 6631 9440 6631 12955.80

68


1 1690.26 1690.26 0.885 1495.80 0.883 1408.55

2 1381.60 3071.89 0.783 1081.99 0.694 959.44

3 1342.33 4414.22 0.693 930.30 0.579 776.81

4 1382.70 5796.92 0.613 848.03 0.482 666.81

5 1428.35 7225.27 0.543 775.26 0.401 574.02

6 1232.77 8458.04 0.480 592.12 0.335 412.85

7 1311.42 9769.46 0.425 557.43 0.279 365.99

8 1201.42 10970.88 0.376 451.93 0.332 279.41

9 960.74 11931.62 0.333 319.81 0.194 186.19

10 1024.21 12955.80 0.295 301.72 0.161 165.42

TOTAL 12955.80 7354.41 5795.51

PAY BACK PERIOD:

= 5+ 8125-7225.27/1232.77

= 5.7 months

NET PRESENT VALUE:


= 7354.40 – 8125

= -770.60

69


= 13+ 7354.40 – 8125/ (7354.40 – 5795.51)*(20-13)

= 13+ (-770.60) / (1558.89)*(7)

= 13+ (-3.46)

= 9.54%



= 12955.8/ 10

= 1295.58


= 8125/2

= 4062.5

= 32%

PROFITABLE INDEX:

PI = 7354.40/8125

= 0.9 Times

70

PROJECT 5


YEARS PBDT

LESS DEP AS PER

INCOME TAX

PBT(-)TAX

33%PAT

ADD: DEP

CFAT CCFAT

1 91.8 672 -580.2 -191.46 -388.73 672 283.26 283.26

2 136.8 187 -50.2 -16.56 -33.63 187 153.36 436.62

3 136.8 159 -22.2 -7.33 -14.87 159 144.13 580.75

4 145.8 135 10.8 3.56 7.23 135 142.24 722.99

5 154.8 115 39.8 13.13 26.66 115 141.67 864.66

6 136.8 98 38.8 12.80 25.99 98 123.99 988.65

7 148.5 83 65.5 21.61 43.88 83 126.88 1115.53

8 136.8 71 65.8 21.71 44.08 71 115.08 1230.61

9 108.9 60 48.9 16.13 32.76 60 92.76 1323.37

10 117.9 51 66.9 22.07 44.82 51 95.82 1419.21

TOTAL 1314.9 1631 -316.1 1631 1419.21

71


1 283.26 283.26 0.885 250.67 0.883 236.05

2 153.36 436.62 0.783 120.11 0.694 106.50

3 144.13 580.75 0.693 99.88 0.579 83.41

4 142.24 722.99 0.613 87.24 0.482 68.59

5 141.67 864.66 0.543 76.89 0.401 56.93

6 123.99 988.65 0.480 59.55 0.335 41.53

7 126.88 1115.53 0.425 53.93 0.279 35.41

8 115.08 1230.61 0.376 43.29 0.332 26.76

9 92.76 1323.37 0.333 30.87 0.194 17.97

10 95.82 1419.21 0.295 28.22 0.161 15.47

TOTAL 1419.21 850.68 688.64

NET PRESENT VALUE:


= 850.68 – 1920

= -1069.32


= 13+ 850.68 – 1920/ (850.68-688.45)*(20-13)

= 13+ (-1069.32) / (162.04)*(7)

= 13+ - (46)

= 33%


72


= 1419.21/ 10

= 141.92


= 1920/2

= 960

= 15%

PROFITABLE INDEX:

PI = 850.68/1920

= 0.44 Times

73

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

74

CHAPTER – VI

FINDINGS AND SUGGESSIONS

75

FINDINGS

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


76

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


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


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


77

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.

78

FINANCIAL STATEMENTS

79

OPERATING RESULTS (RS/LKS)

SL

NO

DESCRIPTION ACTUALS

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

A TURNOVER-BHEL -NON BHEL

3046

171622

27697

239520

61181

228310

667

309568

779

414037

TOTAL TURNOVER 174668 267217 289491 310235 414816

CHANGES IN WIP

CHANGES IN FG

EXPORT INCENTIVES

2400

7295

4238

3165

2338

3397

3975

-8827

1779

17781

4591

2283

10637

4938

1112

GROSS TURNOVER 188601 276117 286418 334890 431503

EXCISE DUTY 19597 23131 22027 27236 24537

B GTO LESS ED 169004 252986 264391 307654 406966

DIRECT MATERIALS

SUB CONTRACT PAYMENT

POWER AND FUEL

TRANSFER IN SERVICE

98043

391

1513

363

146246

459

1758

1163

151552

334

491

1743

183845

790

1840

1394

259592

978

1925

1347

C TOTAL OF ‘C’ 100310 149626 154120 187869 263842

D VALUE ADDED 68694 103360 110271 119785 143124

E PERSONNEL PAYMENTS

INDIRECT MATERIALS

OTHER EXPENSES-BHEL

OTHER EXPENSESNONBHEL

23138

2866

3274

7938

2053

26390

3171

3894

8783

5595

30754

4007

4670

13752

-626

36001

4039

6125

12848

1805

58365

4560

6436

15402

142

80

PROVISIONS

PROV.EXCH.VAR.

LESS.MISC.INCOM

114

6565

-34

7500

288

8351

-1524

11746

-324

13913

TOTAL OF ‘E’ 32818 40299 44494 47548 70668

F GROSS MARGIN (PBIDT) 35876 63061 65777 72237 72456

DEPRECIATION

DRE ON VRS

2153

601

2194 2487 3321 3978

G GROSS PROFIT (PBIT) 33122 60867 63290 68916 68478

INTEREST 1105 -682 -2300 -5870 -6826

H PROFIT BEFOUR TAX 32017 61549 65590 74786 75304

OPERATING COST 136639 201962 221227 234377 338382

81

BALANCE SHEET (RS/LKS)

DESCRIPTION ACTUALS

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

RESOURCES:

FUNDS FROM CORP.OFFICE

RESERVES & SURPULS

INTER UNIT BALANCE(NET)

DEFERRED CREDIT

LOANS

3252

133675

(49905)

513

3252

181157

(77122)

1054

3252

212474

(129311)

607

6504

241734

(131467)

587

6504

271259

(173296)

2566

TOTAL 87535 108341 87022 117358 107033

UTILISATION OF FUNDS

FIXED ASSETS

GROSS BLOCK

OP BAL.

ADDITIONS

DELETIONS

CL BALANCE

LESS CUM EDPRECIATION

38519

3936

42455

33559

42455

3845

46300

35700

46115

4153

50268

38021

46300

4823

51123

41214

51123

11991

63114

45415

NET BLOCK 8896 10600 12247 9909 17699

CAPTIAL IN WIP

INTANGIBLE ASSETS

2509

77

5879

63

7563

19

5404

1667

10139

1930

82

TOTAL (A) 11482 16542 19829 16980 29768

WORKING CAPITAL

CURRENT ASSETS

INVENTORIES

BOOK DEBTS

CASH /BANK BALANCES

LOANS & ADVANCES

INTER UNIT BALANCES(NET)

63734

112238

2094

14631

75016

135322

4643

20081

81476

177301

12

17273

111466

215291

14

24379

141190

287414

15

24978

SUB TOTAL (B) 192697 235062 276062 351150 453597

CURRENT LIABILITIES

ADVANCES FROMCUSTOMER

SUNDRY CREDITORS

OYHER LIABILITIES

PROVISIONS

70840

24225

4091

17488

76754

39495

3800

23151

104813

46452

3093

54511

131961

54586

3034

65151

225986

58078

2910

89358

SUB TOTAL (C) 116644 143200 208869 254740 376332

NET WORKING CAPITAL(B)-(C)

76053 91862 67193 96410 77265

DEFERRED REV.EXPENDITUR

TOTAL 87535 108404 87022 113390 107033

CAPITAL EMPLOYED(EXCL IU)

85026 102525 79459 107986 96894

83

YEAR END INVENTORY (RS/LKS)

DESCRIPTION ACTUALS

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

MATERIAL INVENTORY

RAW MATL & COMP

INDIRECT MATERIALS

MATERIAL IN TRANSIT

TRANSFER IN TRANSIT

MATLS WITH FABRICATORS

SCRAP & OTHERS

16727

1187

4719

1806

3045

108

19656

1286

5038

2107

4963

278

21772

1546

9198

3379

7968

300

25459

1987

14325

4163

5851

490

31900

2400

18100

6400

7100

400

TOTAL OF MATERIAL INVENTORY

27592 33328 44163 52275 66300

PRODUCTION INVENTORY

WORK IN PROGRESS

FINISHED GOODS

25983

10679

29148

13017

33123

4190

50904

8781

61500

13700

TOTAL OF PRODUCTION INVENTORY

36662 42165 37313 59685 75200

TOTAL INVENTORY 64254 75493 81476 111960 141500

TURNOVER 174668 267217 289491 310235 414816

NO OF DAYS OF TURNOVER

134 103 103 132 125

84

STATEMENTS

Latest Quarterly/Half yearly Detailed Quarterly

As On(Months) 31-Mar-2010(3) 31-Mar-2009(3) % Change

Sales of Products/Services 135591.00 105400.70 28.64

Other Income 2079.80 1971.90 5.47

Total Income 137670.80 107372.60 28.22

Total Expenses 110718.40 88437.90 25.19

OPBDIT 26952.40 18934.70 42.34

Interest 178.00 80.90 120.02

Depreciation 1646.90 1008.30 63.33

Exceptional & Extraordinary Items

0.00 0.00 --

Prior Period Adjustments 0.00 0.00 --

Provision for Tax 9887.20 7470.60 32.35

After Tax Profit 19095.80 13474.70 41.72

Equity Capital 4895.20 4895.20 0.00

Reserves 0.00 0.00 --

85

Income Statement

31-Mar-09(12) 31-Mar-08(12) 31-Mar-07(12)

Profit / Loss A/C Rs mn %OI Rs mn %OI Rs mn %OI

Net Sales (OI) 262123.30 100.00 193046.40 100.00 175147.60 100.00

Material Cost 155874.30 59.47 104006.90 53.88 85614.10 48.88

Increase Decrease Inventories -11515.40 -4.39 -8272.60 -4.29 -1811.90 -1.03

Personnel Expenses 29836.80 11.38 26076.90 13.51 23689.50 13.53

Manufacturing Expenses 24190.80 9.23 18204.70 9.43 21950.70 12.53

Gross Profit 63736.80 24.32 53030.50 27.47 45705.20 26.10

Administration Selling and Distribution Expenses

26691.00 10.18 19838.70 10.28 10649.90 6.08

EBITDA 37045.80 14.13 33191.80 17.19 35055.30 20.01

Depreciation Depletion and Amortisation 3342.70 1.28 2972.10 1.54 2729.70 1.56

EBIT 33703.10 12.86 30219.70 15.65 32325.60 18.46

Interest Expense 307.10 0.12 354.20 0.18 433.30 0.25

Other Income 14985.30 5.72 14457.80 7.49 5463.30 3.12

Pretax Income 48381.30 18.46 44323.30 22.96 37355.60 21.33

Provision for Tax 17106.40 6.53 15710.50 8.14 13213.70 7.54

Extra Ordinary and Prior Period Items Net 118.90 0.05 -9.20 -0.00 5.10 0.00

86

Net Profit 31393.80 11.98 28603.60 14.82 24147.00 13.79

Adjusted Net Profit 31393.80 11.98 28603.60 14.82 24147.00 13.79

Dividend - Preference 0.00 0.00 0.00 0.00 0.00 0.00

Dividend - Equity 8321.80 3.17 7465.20 3.87 5996.60 3.42

87

BIBLIOGRAPHY

88

BIBLIOGRAPHY

BOOK/RESOURCE AUTHOR

FINANCIAL MANAGEMENT I.M.PANDEY

FINANCIAL MANAGEMENT KHAN & JAIN

FINANCIAL MANAGEMENT GUPTA & SHARMA

FINANCIAL MANAGEMENT PRASANNA CHANDRA

WEBSITES

www.bhelhyderabad.com

www.bhel.com

[email protected]

89

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MBA ACaDEMIC PROJECT

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