A STUDY ON

CAPITAL BUDGETING
AT
BHARAT HEAVY ELECTRICAL LIMITED

Project report submitted in

Partial fulfillment for the award of

MASTER OF BUSINESS ADMINISTRATION

Submitted by:
JOYICE JOCAB
Bearing Roll No.
08J41E0018

Submitted in partial fulfillment for the award of the

Master of Business Administration

MALLA REDDY ENGINEERING COLLEGE

Sponsored by CMR Educational Society)
Approved by AICTE & Affiliated to JNTU, Hyderabad.
Maisammaguda, Dhullapally, (Post via Hakimpet), Secunderabad-14
Ph:-040-65918418, Fax:-040-23792153, E-mail: aochmrec@rediffmail.com

DEPARTMENT OF MASTER OF BUSINESS ADMINISTRATION

 CERTIFICATE

This is to certify that the project is on the “CAPITAL BUDGETING ” by JOYICE JACOB bearing the
Roll No:08J41E0042 Of the department of MBA is a bonafide work done under the guidance of
Mr.MOHAN RAO, Associate Professor and submitted to JNTU.

Date:
Place:

Head of the Department Internal Guide External Examiner

 DECLARATION

I hereby declare that the project entitled “CAPITAL BUDGETING from BHEL, Hyderabad submitted to
MALLAREDDY ENGINEERING COLLEGE”, Hyderabad in partial fulfillment of the requirements for the
award of the degree “MASTER OF BUSINESS ADMINISTRATION “. The project is an original work
done by me and to the best of my knowledge this work is not submitted to any other college or university
for the award of any other degree, diploma or fellowship.

Date: JOYICE JACOB

Place: 08J41E0018
 ACKNOWLEDGEMENT

The satisfaction that accompanies to the success of the task would be incomplete without mentioning the
names of the people, whose constant guidance and encouragement crown all effects with success. I
consider it as my privilege to express my gratitude and respect to all those who guided, inspired and
helped me in the completion of my project work.

I would like to thank BHEL, Hyderabad for giving me an opportunity to under go a project in their
esteemed organization.

I express my sincere gratitude to Mr. S.SATISH KUMAR, Relationship Manager and other personnel staff
for guiding and encouraging me to the completion of project on time.

I heartily thank Mr. B.Samuel Sushanth, Head of the Department and Internal Guide Mrs.G.V.Venela,
Assistant Professor, Malla Reddy Engineering College, Dhulapally, Secunderabad for their continuous
guidance, monitoring and Encouragement.

Finally, I would like to thank my parents and friends for their moral support.

Date: M.RATNAKER
Place: 08J41E0042
CONTENTS

1. COMAPNY PROFILE.

2. THEORITICAL ASPECTS OF CAPITAL BUDGETING

3. CAPITALS BUDGETING IN BHEL

4. DATA ANALYSIS AND CONCLUSION

5. FINDINGS AND CONCLUSION

RECOMMENDATION AND SUGGESTIONS

6. DATA ANALYSIS AND INTERPRETATION

7. BIBLIOGRAPHY
 CHAPTER 1

COMPANY PROFILE

BHEL –AN OVERVIEW:

BHEL is the largest engineering and manufacturing enterprise in India in the energy-
related/infrastructure sector, today.

BHEL was established more than 40 years ago, 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 has been earning profits continuously since 1971-72 and paying dividends
since 1976-77.

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, four Power Sector regional centre’s, over
100 project sites, eight 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.

BHEL caters to core sectors of the Indian Economy:

1. Power Generation and Transmission,

2. Industry,
3. Transportation,
4. Renewable Energy,

Power Generation and Transmission:

Power Generation Sector comprises thermal, gas, hydro and nuclear power plan business.
The company manufactures 220/235/500/540 MW nuclear turbine-generator sets. Custom-made hydro
sets the power plant equipment manufactured by BHEL is based on contemporary technology comparable
with the best in the world, and is also internationally competitive.

The company has proven expertise in plant performance improvement through renovation,
modernization and up rating of a variety of power plant equipment, besides specialized know how of
residual life assessment, health diagnostics and life extension of plants.
Industries:

BHEL manufactures and supplies major capital equipment and systems like captive power plants,
centrifugal compressors, drive turbines, industrial boilers and auxiliaries, waste heat recovery boilers, gas
turbines, pumps, heat exchangers, electric machines, valves, heavy casting and forgings etc. to a number of
industries other than power utilities like metallurgical, mining, cement, paper, fertilizers, refineries and
petro-chemicals, etc. BHEL has also emerged as a major supplier of controls and instrumentation systems,
especially distributed digital control systems for various power plants and industries.

Transportation:

Most of the trains on Indian Railways, whether electric or diesel powered are equipped with BHEL’s
traction propulsion system and controls. The systems supplied are both with conventional DC drives and
state of the art AC drives. India’s first underground metro at Kolkata runs on drives and controls supplied by
BHEL.

Renewable energy:

BHEL has been manufacturing and supplying a range of renewable energy system and products. It
includes solar energy system namely PV modules, PV power plants, solar lanterns, street lighting, solar
pumps and solar water heating system. A large no of small hydro power stations have also been completed.
New areas like wind power generation etc. are also being explore for entry.

ABOUT BHEL RAMACHANDRAPURAM UNIT:

The Ramachandrapuram unit of Bharat Heavy Electricals Limited (BHEL) has achieved its highest-
ever turnover of Rs. 5,004 crore and a record profit of Rs. 930 crore during the year 2009-10.

The company registered a 21 per cent increase in turnover as compared to Rs. 4,149 crore and 24 per
cent increase in profit from Rs. 753 crore in the previous fiscal despite global instability, stiff competition
and critical input constraints. BHEL Ramachandrapuram has set a target of achieving a turnover of Rs.
6,651 crore in the current fiscal, envisaging 33 per cent growth.

Announcing the company's results here on Monday, BHEL Ramachandrapuram general manager (in-
charge) R. Krishnan said the unit had a healthy order book of Rs. 15,264 crore and it was facing a major
challenge in meeting the contractual requirements. It was, therefore, decided to accelerate manufacturing
and project delivery for which initiatives such as outsourcing of finished assemblies, pre-order advance
manufacturing and process improvements were being taken.

He said the unit was contemplating to significantly enhance capital investment for capacity expansion
during the current fiscal and Rs. 205 crore, 60 per cent higher than the previous year's Rs. 128 crore, had
been earmarked towards this end.

Mr. Krishnan said the company was gearing up to meet super critical applications as adoption of
super critical technology was essential for the low carbon growth strategy of the country. BHEL had also
initiated steps to enter into technology tie-ups for higher capacity compressors to cater to the ever-increasing
demand from fertilizer plants and refineries.

In line with its commitment to expand manufacturing capacity to 20,000 MW by 2012, BHEL had
invested more than Rs. 200 crore during the previous year while the company was fully on track to surpass
the strategic plan target of Rs. 7,000 crore by the end of 2011-12

Evolution and growth of BHEL Hyderabad unit :

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 Boards and also 12 MW 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, Industry, Transmission, Oil and Gas. It now boasts the largest
number of products under a single roof as compared to any of the other BHEL Units.

Phase. I - Project Implementation & Technology absorption (1959-70)

Phase. II - Diversification (1971-78)

 Phase.III - Technology upgradation (1979–85)

Phase.IV - Market orientation (1985-91)

Phase.V - Adaptation to liberalization (1992-2002)

Phase.VI - Modernization and Capacity enhancement (2003-2012)

ABOUT B.H.E.L 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 manufacture 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 manufactured 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 Tiruchirapalli 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. The company now has 14 manufacturing units, 8
service centers and 4 Power stations spread all over India and abroad.

• BHEL manufactures over 180 products under 30 major product groups and meet the needs of core
sector like Power, Industry, Transmission, Defense, Telecommunications, Oil business etc. Its
products have established on enviable reputation for high quality and reliability. This is due to the
emphasis placed all along on Design, Engineering and manufacturing to International Standards by
acquiring and adapting some of the best technologies developed in its own centers. BHEL has
acquired ISO 9000 certification for quality management and ISO14001 certification for Environment
Management. BHEL caters to the needs of different sectors by Designing and Manufacturing
according to the needs of its Clients in Power sector.

BHEL Ramachandrapuram unit to upgrade gas turbine facility

 THE BHEL Ramachandrapuram unit has decided to upgrade its gas turbine facility with an initial
investment of Rs 34 cores during the current financial year. The investment is essentially directed towards
procuring machinery to strengthen the existing infrastructure, according to Mr. A.N. Jagadeeswaran,
Executive Director.

Buoyed by the good performance in the gas turbine sector, BHEL is also diversifying into advanced class
turbines, low-cost steam turbine generators and export markets, Mr. Jagadeeswaran told Business Line.

With orders from Kazakhstan, Iran, Oman in hand, the company was exploring markets in Algeria, Nigeria,
Iran, Bosnia and other Latin American countries. Plans had also been firmed up for the manufacture of gas
turbine-driven compressors for gas transportation/LNG projects, he said.

The Ramachandrapuram unit is also focused on upgradation of gas turbines and retrofitting for low
emissions. The BHEL unit, achieved a turnover of Rs 1,533 cores during fiscal 2001-02. It is pinning its
hopes of quick turnover growths in the power sector. The Union Power Ministry has set an ambitious target
of adding about one lakh MW of power during the Tenth and Eleventh Five-Year plans.

BHEL had also equipped itself to provide expertise in life extension studies for the existing power plants in
the country, he said.

In the power sector, BHEL units wants to diversify into setting up small, biomass-based power plants of the
size of 10-15 MW. "There is a definite demand for such compact alternate energy units and we propose to
capture this market with our advantages", he added.

The Ramachandrapuram unit has emerged as an important contender for the 660 MW supercritical power
plant of NTPC proposed in Madhya Pradesh. The company has identified a foreign consortium partner and
the bid for the project is to be executed on a turnkey basis, as for the NTPC's 500 MW Simhadri power plant
in Andhra Pradesh, he said.

In the area of pumps and heaters, BHEL units had signed up MoUs with Sulzer Pumps of Switzerland for
the design, upgradation and retrofit of different pumps.

INTERNATIONAL OPERATIONS

BHEL has exported its equipment and services to over 50 countries. In Malaysia, BHEL has supplied 80%
of the Boilers besides several Hydro sets and Gas Turbines. BHEL equipment are in operation in Matta, Cy,
Saudi Arabia, Oman, Egypt, Libya, Greece, Bangladesh, Srilanka, Iraq, Australia etc. BHEL exports
turnkey power projects of Thermal, Hydro, Gas based types, Substation projects Rehabilitation project
besides a wide variety of product like Insulators, Transformers, Valves, Motors, Traction Generators and
services for Renovation and Modernization and Operation Power station.

RESEARCH AND DEVELOPMENT (R & D)

BHEL is one of the few companies world wide involved in Development of Integrated Gasification
Combined Cycle (IGCC) Technology, which word uses in clean Coal Technology. BHEL R & D efforts
have produced several new products. Some of the recent successful R & D products are Automated Storage
Retrieval Systems, Automated Guided Vehicles for Material Transportation, Automatic Robotic Welding
Systems.

HUMAN RESOURCE AND DEVELOPMENT (HRD)

The greatest strength of BHEL is its highly skilled and committed people. Every employee is given equal
opportunity to develop himself and improve his position. Continuous training and retraining a positive work
culture and participation style of management have led to the Development of a motivated work force and
enhanced Productivity and Quality.

COMPANY VISION, MISSION AND VALUES:

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

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.

PRODUCT PROFILE

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
• Oil Rigs
• Electrics for Urban Transportation System

GAS TURBINES
BHEL - the largest Gas Turbine manufacturer in India, with the state-of-art facilities in all areas of Gas
Turbine 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.

STEAM TURBINES

BHEL has the capability 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 upto
6000C. Steam Turbines are manufactured under technical collaboration with Siemens, Germany covering the
whole rang of requirements for Drive, Cogeneration, Captive Power, Utility and Combined Cycle
applications. BHEL today, is fully equipped to provide comprehensive service to clients covering system
engineering, equipment design, and turnkey erection and commissionin
 COMPRESSORS

BHEL made its foray into Centrifugal Compressors in the year 1970 with technical collaboration from
Nuovo Pignone, Italy and since then has been catering to the Fertilizer, Refinery, Petrochemical and other
process industries. BHEL today, has built up a cumulative experience of more than 30 million hours of
operation for various applications.

BHEL offers CENTRIFUGAL compressors for pressures as high as 350Kg/Cm2 and flows upto 350,000
Nm3/Hr. BHEL has the unique capability of offering the Compressor with any kind of drive being a
manufacturer of Gas Turbine, 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, anti-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/Specification as

• API 610 Centrifugal Pumps

• API 611 Auxiliary Steam Turbines

• 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 Displacement Pumps

• IS 325 Auxiliary Electric Motors

• ASME PTC 10 Performance Test

• ASME Sec. VIII & IX Heat Exchangers

TURBO GENERATORS

BHEL presently has manufactured Turbo-Generators of ratings upto 560 MW and is in the process of going
up to 660 MW. It has also 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 diverse industrial
applications like Paper, Sugar, Cement, Petrochemical, Fertilizers, Rayon Industries, etc. Based on proven
designs and know-how backed by over three decades of experience and accreditation of ISO 9001, the
Turbo-generator 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.

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

PULVERIZERS

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.

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.

SOLAR WATER HEATING SYSTEMS

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 37 Lakh 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); Milk dairies and chilling plants; space
heating in central air conditioning systems; pre-heating of boiler feed water.

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

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, 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.

BHEL offers services for refurbishment and modernization of the rigs and rig equipment of both BHEL
make and also others. This includes

• Total inspection of rig equipment

• Major overhauling of rig equipment
• Supply of spares (for BHEL make rigs)
• Refurbishment of rig equipment
• Repairs on mast and substructures and reassessment of
the structure
• Up gradation of rigs
• Supply and installation of Independent Rotary Drive system on the conventional
drilling rigs.
ELECTRICS FOR URBAN TRANSPORTATION SYSTEM

• 25 KV AC, 50 HZ, single phase, broad gauge/metre gauge, Electrical Multiple Units with DC
Drives.
• 1500V DC, broad gauge/meter gauge, Electric Multiple Units with DC Drives.
• 25 KV AC/1500 VDC broad gauge Electrical Multiple Units with 3 phases drive.
• Diesel Electric at Multiple Units
• Metro Railway.
• Tram Cars
•

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.

STRENGTHS

• Vast pool of Trained Man Power.

• Excellent state of art facilities.
• Good working atmosphere.
• Rapport between Management and Union.
• Product manufactured to International Quality.
• Low labour Cost and Low manufacturing cost.

WEAKNESSES

• Excess Man Power.

• Slippage in delivery commitments.
• System implementation inadequate.
• No Financial package.
• 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.

THREATS

• Liberalization – Entry of MNC’s or Private sector – more competition

• MNC’s taking away good employees with attractive packages.
• Government taxation policy – against manufacturing sector.
 CHAPTER – 2

THEORATICAL ASPECTS OF CAPITAL BUDGECTING

AN OVERVIEW OF FINANCIAL MANAGEMENT

EVOLUTION OF FINANCIAL MANAGEMENT:-

Financial management emerged as distinct field of study at the turn of the 20 century.Its evolution may be
divided into three broad phases.

TRADITIONAL PHASE:-

It begins the early 1940ss and continued through the early 1950s.Though the nature of financial management
during this phase was similar to that of the traditional phase, greater emphasis was placed on the day-to-day
problems faces by financial managers in the areas of funds analysis, planning and control. The focus shifted to
working capital management.

MODERN PHASE:-

It begins in the mid 1950s and has witnesses an accelerated pace of development with the infusion of ideas from
economic theory and application of quantitative methods of analysis. Their central concern of financial
management is considered to be a rational matching of funds to their uses so to maximize the wealth of current
shareholders.
Financial management is service activity, which is associated with providing quantitative information, of
financial nature and that which may be needed for making economic decision regarding the choice among
alternative course of actions.
Thus financial management process of identification, accumulation, analysis, preparation, interpretation and
communication of financial and control a business firm.

DEFINITIONS:-

“Financial management is an area of financial decision –making harmonizing individual motives and
enterprise goals”
Weston and Brigham
“Financial management is the application of the planning and control functions to the finance functions”
Howard and Upon.

FINANCIAL DECISION IN A FIRM

CAPITAL BUDGETING DECISIONS

The first and perhaps the most important decisions that any firm has to make is to define the
business or businesses that is wants to be this decision has a significant bearing on how capital is allocated in the
firm.

CAPITAL STRUCTURE DECISIONS

Once a firm has decided on the investment projects it wants to undertake, it has to figure out ways and means of
financing them. The key issues in capital structure decisions are: what is the optimal debt-equity ration of the
firm? Which specific instruments of equity and debt finance should the firm employ? Which capital markets
should the firm access?

DIVIDEND DECISIONS

Determining the dividend policy is an important task. The dividend decision involves what percentage of profit
to be paid of the shareholder. A number of factors affect the dividend decision such as market price of the share
earnings, tax positions etc.

WORKING CAPITAL MANAGEMENT

Working capital management, also referred to as short-term financial management, refers to the day-to-day
financial activities that deal with current assets (inventories, debtors, short-term holdings of securities, and cash)
and current liabilities (short-term debt, trade creditors, accruals and provisions).
The key issues in working capital management are:
What is the optimal level of inventory for the operations of the firm?
How much cash should the firm carry on hand? Etc
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
benefit expected from the proposal is greater than the initial cash outlay required to implement the proposal.

RISK-RETURN TRADEOFF

The alternative course of action typically has different risk-return implications. A large plant may have a
higher expected return and a higher risk exposure, where a small plant has may have a lower expected return and
a lower risk exposure. A higher debt-equity ratio, compared to a lower debt-equity ratio, May reduced the cost of
capital but expose the firm to greater risk.

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.

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.

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 HAVE THREE DISTINCTIVE FEATURES:-

1. They have long-term consequences

2. They often involve substantial outlay.
3. They may be difficult or expensive.

FEATURES:-

• 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 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.
This underlines the need for thoughtful, wise and correct investment decisions.

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.
DIFFICULTIES:

Capital budgeting are not easy to take there are no of factors responsible for this
• The benefits from investments are received in some future period. The future is uncertain.
Therefore, an element of risk is involved. A failure to forecast correctly will lead to serious errors,
which can be corrected lonely at a considerable expenses
 • Problems are also arising because cost incurred and benefits received from capital

• Budgeting decisions occur at different time period. They are not logically comparable because of the
time value of money.

• It is not often possible to calculate in strictly quantitative term, all the benefits of the cost relating to
a particular investment decision.

RATIONALE:-

The rationale underlying the capital budgeting decisions is efficiently. Thus a firm must replace wrong
and obsolete plant and machinery, acquire fixed assets for current or new products and make straight
investment decisions. This will enable the firm to achieve the objectives of maximizing the profits. The
quality of these decisions is improved by capital budgeting.

Capital budgeting decisions can be of two types:

1) Those which expand revenues

2) Those which reduces costs

INVESTMENT DECISIONS EFFECTING REVENUE:

Investment decisions are expected to bring in additional revenue there by raising the size of firms total
revenue. They can be the result of either expansion of present operations of the development of new product
line these decisions involved acquisition of new fixed assets.

INVESTMENT DECISIONS REDUCCUIND COST:-

These decisions add the total revenue of the firm. These investment decisions are subject to less
uncertainty. This is because the firm has a better “feel” for potential cost saving as it can examine past
production and cost data.

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.

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’s 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.
Bother the above principles have to be applied to take the right decision

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.

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 = -------- Initial investment
Ct

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

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.

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.
E.
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:

Investment = n
-------
?

T = Ct
---------
1(i+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

Calculation fake payback period

Fake PBP = Initial investment

 ------------------------
Average cash flow

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.

STEPS

Actual IRR can be calculated by using the following formula:

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

IRR = --------------------------------------------------------------------------------- (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

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.

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:

Total present value of cash inflows

PI = ------------------------------------------------
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.

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.
Original investment
PBP = ------------------------------------------
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.

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 PEP:

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.
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) It is the best method incase 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 are 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.

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 tax

ARR = ------------------------------------------------- *100
Average investment
Average Investment = Net Additional working capital + Salvage value +
1/2(Original Investment-Salvage value).

Total cash flow after tax

Average Annual profit 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.
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.

MERITS:
 1) It is simple to understand and easy to calculate,
2) The entire stream of incomes is used to calculate the average rate of return.
MERGER AS A CAPITAL BUDGET:

Under this method the merger decision should be considered as project investment decision, the NPV
mergers should be determined by comparing the present values of the acquisition firm after merger.
NPV = (PV of merger firm X holding value of acquiring firms) - (PV of acquiring firm),

RISK AND UNCERTAINITY IN CAPITAL BUDGETING:-

All the techniques of capital budgeting requires the estimation of future cash inflow and cash outflows. The
cash flows are estimated abased on the following factors.

• Expected economic life of the project.

• Salvage value of the asset at the end of the economic life.

• Capacity of the product.

• Selling price of the product.

• Production cost.

• Depreciation.

• Rate of Taxation

• Future demand of the product, etc.

But due to uncertainties about the future the estimates of demand, production, sales costs, selling
price, etc cannot be exact, for example a product may become obsolete much earlier than anticipated due to
un expected technological developments all these elements of uncertainties have to be take into account in
the form of forcible risk while making an investment decision. But some allowances for the element of risk
have to be proved.

FACTORS INFLUENCING CAPITAL EXPENDITURE DESCISIONS:

There are many factors financial as well as non financial which influence the capital expenditure
decisions and the profitability of the proposal yet, there are many other factors which have to be taken into
consideration while taking a capital expenditure decisions. They are

1) URGENCY:

Sometime an investment is to be made due to urgency for the I survival of the firm or to avoid heavy
losses. In such circumstances, proper evaluation cannot made though profitability tests. Examples of each
urgency are breakdown of some plant and machinery fire accidents etc.
 2) DEGREE OF UNCERTAINTY:

Profitability is directly related to risk, higher the profits, greater is the risk or uncertainty.

3) INTANGIBLE FACTORS:

Sometimes, a capital expenditure has to be made due to certain emotional and intangible factors
such as safety and welfare of the workers, prestigious projects, social welfare, goodwill of the firm etc.

4) AVAILABILITY OF FUNDS:

As the capital expenditure generally requires the previsions of laws solely influence by this factor
and although the project may not be profitable. Yet the investment has to be made.

5) FUTURE EARNINGS:

A project may not be profitable as competed to another today, but it may be profited to increase
future earnings.
Sometimes project with some lower profitability may be selected due to constant flow of income as
compared to another project with an irregular and uncertain inflow of income.

CAPITAL EXPENDITURE CONTROL:

Capital expenditure involves no-flexible long-term commitments of funds. The success of an

enterprise in the long run depends up on the effectiveness with which the management makes capital
expenditure decision. Capital expenditure decisions are very important as their impact is more or less
permanent on the well being and economic health of the enterprise. Because of this large scale
mechanization and automation and importance of capital expenditure for increase in the profitability of a
concern. It has become essential to maintain an effective system of capital expenditure control.

OBJECTIVES CONTROL OF CAPITAL EXPENDITURE:

• To make an estimate of capital expenditure and to see that the total cash outlay is within the financial
resources of the enterprise

• To ensure timely cash inflows for the projects so that no availability of cash may not be problem in
the implementation of the problem.

• To ensure that all capital expenditure is properly sanctioned.

 • To properly coordinates the projects of various departments

• To fix priorities among various projects and ensure their follow-up.

• To compare periodically actual expenditure with the budgeted ones so as to avoid any excess
expenditure.

• To measure the performance of the project.

• To ensure that sufficient amount of capital expenditure is incurred to keep pace with rapid
technological development.

• To prevent over expansion.

STEPS INVOLVED IN CONTROL OF CAPITAL EXPENDITURE:

• Preparation of capital expenditure budget.

• Proper authorization of capital expenditure.

• Recording and control of expenditure.

• Evaluation of performance.
LEASE FINANCING:-

Lease finance is an agreement for the use of an asset for a specified rental. The owner of the asset is called
the lesser and the user the lesser
1) Operating leases
2) Financial leases
Operating leases are short-term no-cancel able leases where the risk of obsolescence in borne by the lesser
Financial leases are long-term non-cancelable leases where any risk in the use of asset is borne by the lessee
and he enjoys the return too.
• Preliminary budget estimates for the year following the budget year.
GENERAL GUIDELINES:-

The capital funds budget is to be prepared under six major heads.

1) Continuing schemes
2) New schemes
3) Modernization and rationalization
4) Township
5) Science and technology
 6) EDP schemes
SCIENCE AND TECHNOLOGY

CONTINUING SCHEMES:-

These schemes include all such schemes which are under implementation of which funds prevision has been
made in the current year /prevision is required in the budget year.

NEW SCHEMES:-

This scheme includes all such schemes, which are proposed to be initiated in the budget year and for which
under provisions is required in the budget year. Normally, such schemes are included in the five-year plan
of the company approved by the planning commission.

MODERNIZATION AND RATIONALIZATION (M&R):-

This includes item of plant and machinery etc for which funds required in the budget year and the following
year. All item included in M&R should result in cost reduction/quality improvement/rebottle
necking/replacement/productivity, improvement and welfare. The M&R items are to be submitted in the
following main characteristics accompanied with full justification on the agenda of facilities increased
output and production, quality requirements bottlenecks.
Replacement/modernization.
Balancing facilities (essentially to increase production).
Operational requirements including material handling
Quality/testing facilities.
Welfare
Minor works.
These requirements should be protested term wise. A separate proposal is required for M&R items costing
more than Rs 10, 00,000.

TOWNSHIP:-
• Township budget is divided into two parts.

• Continuing township schemes

• New townships schemes.

Funds required under each schemes should be backed up with full data on number on quarter/scope of work
to be completed against the funds requirements phasing of budgeted funds for current year, budget year and
following year etc, should be given similar information on number of quarter/scope of work already
completed, expenditure incurred till last year, satisfaction level it is to be added in the above back up
information for each scheme.

SCIENCE AND TECHNOLOGY:-

• This budget can be divided into two categories
 • Continuing schemes.

• New schemes to be taken up in the budget year.

The schemes should fall in any of the above cartages giving details on physical and financial progress etc.

EDP SCHEMES:-
All funds requirements for computer are information system should be grouped under EDP schemes and
projects accordingly.

BUYING OR PROCURING:
Buying or procurement involves purchasing an asset permanently in the form of cash or credit.

LEASING VS BUYING:
Leasing equipment has the tax advantage of depreciation, which can mutually benefit the lesser and lessee,
other advantage of leasing, include convenience and flexibility as well as specialized services to the lessee.
Lease privies handy to those linens, which cannot obtain loan capital form normal sources.
The pros and cons of leasing and buying are to be examined thoroughly before deciding the method of
procurement i.e. leasing or buying.

CAPTER – 3

CAPITAL BUDGETING IN BHEL

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

The capital budgeting in BHEL is based manual, which covers the following aspects.

1) CAPITAL FUNDS BUDGET:-

• Five year plans

• Annual plan 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

DEFINITIONS:-

CAPITAL EXPENDITURE:-

All expenditure exceeding Rs. 10,000 which results in the acquisition of permanent assets is called
capital expenditure. These assets are intended to be continuously used the business for the purpose or
earning revenue directly or indirectly.

FIVE-YEAR PLAN:-

Five–year plan of the company constitute the preliminary programmed of budgeted investment during
the plan period of 5 years. These investments are planned against the categories Viz schemes under
implementation of new schemes to be taken up science and technology, modernization and rationalization
and welfare faculties.

ANNUAL PLAN:-

The annual plan comprises yearly capital investment funds budget of the company to be submitted to
the government for approval. The allocated funds by the government are utilized in the planned manner
against at the investment schemes modernization and rationalization, township, science and technology.

CAPITAL FUNDS BUDGET:-

Capital funds budget is what enable a programme of action on all capital expenditure item to be
grouped in one consolidated document. This outlines the proposal for creation of new assets additions for
increase in production; diversification r reduction of coast ensures how these ventures will be financed over
a given period. Included five year plan, annual plan exercise and no-plan budget exercised, which are
described blow.

FIVE-YEAR PLAN:-
 The government has been formulating five-year plans for the economic growth of the country. In line
with this policy, BHEL also formulates the five-year plans of the company and submits to the government
for inclusion in every five-year plan of the country.
Five-year plans exercise normally starts from the third year of the previous five-year plan. These
schemes included in the five-year plan approved by planning commission are prioritized for implementation
depending on the need/resources etc, these schemes should be in line with perspective plan of the company.

FINDING:-

Plan funds are provide by the planning commission for each scheme based the progress, funds
availability etc, the five-year plan funds are then distributed and released as per the annual plans of the
undertakings.

ANNUAL PLAN EXERCISE:-

The capital funds budget/annual plan is meant for making provision for cash expenditure of capital
nature including the foreign exchange component however necessary.
The capital funds budget will mainly contain the following information along with other
information.
1) Revised estimates for the current year.
2) Budget estimated for the ensuring year i.e. budget year
FUNDING MODE:-

As per present practice, the annual plan/capital funds budget of the company is financed under two
major heads
Budgetary supports from the government.

Internal resources of the company.

1) The budgetary support from the government is received in the form of loan and equity
the ratio of 1:1 approximately as per the government guidelines.
2) Internal resources are the company’s own funds/reserves. The present trend indicates
gradual decline budgetary support from the government and it is insisting on utilizing
of more internal resources for capital funding. This necessitates a rigorous and critical
budget formulation exercise.

BUDGET SUBMISSION

The complete consolidated capital funds budget as per the prescribed formats/information required
giving revised budget for current year, funds budget for ensuring year (i.e. budget year) preliminary budget
for the year following the budget year should reach corporate office be 10th August every year. The division
will be communicated about the board approval/provisional government indications by December/January
every year.
 The flow chart for the annual followed in BHEL any be indicated by the following flow
diagram.

NON-PLAN BUDGET EXERCISE:-

All expenditure on capital equipment like cranes, materials handling equipment, special tools and
plants equipment, which are required at project sits for erection and commissioning purpose etc, should be
considered as non-plan expenditure.
It is classified under 3 categories.
T&P which could be used for more than one project.
T&P unlikely to be available for more than one project.
T&P supplied subcontractor.

FEASIBILITY REPORT:-

Guidelines for preparation of feasibility report.

For investments a detailed feasibility report is required to be formulated for approval of the competent
authority. The feasibility report must spell out in detail the following,
• Objectives of the scheme/project.

• Consistency with the company plans/policies.

• Inputs required and their phasing.

• Financial economic analysis.

• Implementation plan.

• Expansions programmed in future if any.

In BHEL the capital investment proposal can be classified broadly as

• Schemes for expansion of plan capacity diversification etc.

• Modernization and rationalization, including replacement schemes

• Township

• Science and technology

SCHEMES/PROJECTS:-

Feasibility report for such schemes should include an analysis for the plant initiating the report. Its
present status, its products and this role in the industry. Government view on the present future growth
plants for true industry to which the products belong and current five year plan provisions for the scheme
should also be brought out.
NEED FOR THE PROJECT:-

A brief paragraph on alternatives examined/results obtained should be included in the report.

This should done taking into consideration factors like optimum size of the plant, location, product
mix, technology, emend, transportation etc.

TECHNOLOGY CONSIDERATION/CHOICE:-

For the products to which the scheme related all consideration/Para parameters analyzed us in making
the choice should be outlined. These may enumerate as follows.
• Suitability of technology for the product/raw material available

• Status of technology within BHEL

• Whether exiting/new technology, if new reasons for preference and benefits.

• Trends in worked local markets.

• Competitiveness of the technology chosen.

• Collaboration proposed

• R&D activities required.

• Changes of technology chosen getting obsolete.

PROJECT DESCRIPTION;-

In order to help the appraisal in analyzing evaluating the proposal, the description should touch
upon site, equipment requirements, input requirements, labors phasing of construction, production built up,
and any collaboration required, housing needs etc.

MARKETING:-

The detailed market analysis in the feasibility report should answer questions like,
Total market potential for the product.

Expected market share.

Competitor’s details.

Based on the market survey the demand supply position I details should be given.
Marketing plan for the product based on market survey and studies conducted for the product should
be mentioned in the report.

CAPITAL INVESTMENT REQUIREMENTS:-

 It is necessary that the estimates of capital costs presented in the feasibility report should be reasonable
complete and properly estimated. For the purpose of the project appraisal, capital costs are essentially those
costs, which are incurred before the commencement of commercial production. For fixed assets costs like
customs duty, excise insurance, transportation at the latest applicable rate should be calculated.

OPERATING REQUIREMENTS:-

For the purpose of project appraisal, operation costs are essentially those costs, which are incurred
after the commencement of commercial production. This will help in financial analysis.
FINANCIAL ANALYSIS:-

The purpose of financial analysis of a project is to presents some measures to assess the financial
viability of the project. The data presented in this format should be consistent with the production plans,
operation costs, and capital costs.

SENSITIVITY ANALYSIS

The feasibility report should also briefly indicate present the results of sensitivity analysis. This is
relevant whenever the key assumptions made in the feasibility report are likely to be changed/affected.

PROJECT IMPLEMENTATION PLAN:-

The feasibility report should briefly indicate the project implementation, organization that will be
responsible for executing the scheme. This is most essential for expansion/diversification schemes at
existing plant locations.
ECONOMIC ANALYSIS:-

Economic analysis the visibility of the project is evaluated taking in, to the account the opportunity
cost of the tradable inputs/outputs, which go in to the project, shadow prices for foreign exchange, domestic
resources costs to the non-tradable inputs. Such analysis may be relevant for planning commission in
evaluating the projects form the national perspective/plans.

PREPERATION OF DETAILED PROJECT:-

For all capital investment schemes, which have been approved by the government, it is essential to
prepare a detailed project report, which will form the basis of project execution. The purpose of detailed
project report is not only to enable projecting a realistic requirement of budgetary funds, but it would also
improve the planning the implementation aspects of capital projects. The detailed projects reports should be
submitted within six months from the date of financial sanction for the scheme.

MODERNISATION AND RATIONALISATION

Plant modernization and rationalization, which is in operation for sometime is very important. The
facts about the wear and tear of the equipment, change in technological process quality improvement cannot
be denied. All this needs a marginal investment in the existing plants/units. This may also be very essential
to meet the production targets customer satisfaction proposals can be classified to fall under the following
categories:

1. Technological up gradation

2. Cost reduction efficiency improvement.

3. Replacements

4. Production diversification.

In most of the cases, if the equipment procured is of very high values the exceeding Rs.20 lacks it is
necessary to treat the same as a scheme and to justify the proposal on the basis of financial analysis
wherever possible.
In some of the cases involving quality involvement etc. Where it may be difficult to quantify benefits
for the purpose of financial viability, stress should be laid on selecting the optimums cost option. In regard
to cost reduction efficiency improvement proposal, the recommendation of technological industrial
engineering departments supported by financial analysis can be furnished.

TOWNSHIP SCHEMES

The investment made on civil scheme is also capital investments and any such investment has to be
supported by proper justification as per guidelines of the government. The most common types of township
schemes are:
• Residential quarters for employees
• Shopping centers
• Schools
• Hospitals
• Community halls
• Parks etc.

SCIENCE AND TECHNOLOGY

→ The capital investment under science and technology for R&D purpose should be considered under
the following heads.
→ R&D items/schemes envisaged for commercialization in a specified time span
→ R&D schemes for product development.
→ R&D schemes dealing with new products.
→ R&D schemes dealing with new products.
→ Computer schemes

EXTERNALLY FUNDED SCHEMES

Schemes can be taken up with foreign assistance from UPDA World Bank KFW other agencies.
 The feasibility report prepared by the company has to be first approved but the BHEL board of
directors and government before it is considered for external funds. The board of directors and government
before it is considered for external funds. The departments involved in approving process are Department
of heavy industry, planning commission, department of economic affairs in ministry of finance.

Company plans/objective
Government policy/five year plans
Examination of various alternatives and results.

BASIC STRUCTURE/LAYOUT OF TYPICAL FEASIBILITY REPORT:

1. NEED FOR THE PROJECT

• Company plans/objectives

• Government policy/five year plans

• Industry details

• Examination of various alternatives and results

2. TECHNOLOGY CONSIDERATION AND CHOICE

3. PROJECT DESCRIPTION

• Site selection/availability of existing infrastructure

• Environmental consideration

• Housing

• Plant & machinery equipment description

• Constructions description and materials

• Manpower

• Transportation

• Planning of construction

• Production/priceless technology

• Input requirements
4. MARKETING DEMAND SUPPLY ANALYSIS

• Industry data

• Demand/supply position
• Choice and product mix

• Selling price

• Export potential marketing organization

5. CAPITAL INVESTMENT REQUIREMENT

• Capital cost for plant and machinery, civil works building

• Basis for estimation

• Other items of capital cost/interest during construction

• Incidental expenses during constructions

• Working capital requirements

6. OPERATING REQUIREMENTS

• Operating cost and its basis

• Inventory

• Production built up
7. FINANCIAL AGENCIES

• Assumptions made regarding depreciation, income tax, investment allowances,

• Profit and loss statement

• Return on investment at various plant capacities,

• Discount cash flow analysis

• Financial statement

• Break even analysis

8. PROJECT IMPLEMENTATION

• Schedule of the activities of the project

• Project organization

• Availability of scare construction inputs

 • Infra structure
9. SENSITIVITY ANALYSIS

• With respects to demand forecast

• With respect to capital costs

• With respect to input price

• With respects to any other critical element.

10. ECONOMIC ANALYSES

• Foreign exchange savings

• Development of labour skills/employment generated

• Ancillary development

• Export

• Time cycle reduction

PROGRESS REPORTING/MONITORING

NEED: -

Once the capital budget has been approved, it has to be ensured that targets laid down
regarding physical progress adhered to. Any shortfall in this regard is likely to delay the completion of
project and ultimately affects production program me. Therefore, each project is continuously monitored at
division level both physical and financial.
For major projects costing more than 5 crores, project review committees are required to be constituted
having representatives from project unit and corporate office. These committees should meet periodically to
review the progress and recommend taking corrective actions.

REPORTING PROCEDURE:

At the beginning of each financial year mid April each division should a detailed month wise cash
outflow plan for each scheme linked with the major physical activities of that scheme. Complete progress of
the scheme for the budget year should be reported on this plant.

1. MONTHLY REPORTING:

The capital expenditure progress should be reported to corporate office in this first week of the every
month with effect from April
 2. QUARTER REPORTING:

Apart from above, quarterly report should be submitted to corporate for the purpose of information to
be sent to government/directors and CMD on the progress status every quarter.

3. COMPLETION REPORT:

In case of completed projects, a completion report should be submitted one year after the start of
commercial production

REPLACEMENT GUIDELINES:

Substantial investments have been made in the plant and machinery in all the BHEL manufacturing division.
Through modernization and expansion programmers, new machine tool has been added from time to time.
New projects are underway increasing investment in plant and machinery still to higher level.
Capital expenditure will be considered to have been accrued on replacement of an item equipment is
declared to be unfit to perform the desired functions and similar technologically better piece of equipments
is purchased in its place to continue the specific work.
Replacement of plant and machinery may be warranted for the following reasons:
1. Due to natural wear and tear
2. Technological obsolescence
3. Change in service requirements
4. Accident
PROCEDURE FOR REPLACEMENT

Each unit will have replacement committee, the replacement committee should comprise representatives
from manufacturing technology, maintenance and services, factors engineering, finance industrial
engineering management services and central planning divisions. They are representatives from the
maintenance and services department will be the convener does not change often. The committee may
formulate a written guideline indicating factors, which are to being taken on to account while carrying out
technical appraisal. Once the need for replacement is established and various alternatives suggested, the
proposal would be submitted to replacement committee for taking the decisions.

DISPOSAL OF EXISTING MACHINE

Replacement committee will also decide the manager in which the existing machine tool, outside party, it
will pre-empt the possibility of assigning the existing machine to alternative views with in the division or
sister divisions. Having taken the decision on the disposal, responsibility may be fixed on suitable agencies
within the division.
GOVERNMENT GUIDELINES/POLICIES

Reference has been made in the manual to various governments’ publications containing
guidelines/policies which are relevant/useful for the capital budgeting exercise within the BHEL and with
the other government departments.

PROCEDURE OF CAPITAL BUDGETING IN BHEL

The following budgeting procedure in BHEL is done in four phases which can be explained as follows:

FIRST PHASE
This phase involves the different aspects involved in approval put forth by the department concerned. The
different steps involved are:-
1. A letter of requisition with the proposal is sent to the department concerned to the R&D
department. This letter contains the specifications of the item and in the case of replacement the
need for the replacement is to be clearly specified along with the estimate
2. This proposal is sent from R&D department to finance, industrial engineering and maintenance
and services departments for their consent.
3. Finance department looks into the financial aspects of the proposal.
4. Industrial engineering department checks whether the specifications are apt for the proposal.
5. Maintenance and service department.

SECOND PHASE
This phase involves the following steps:
1. The departments which has sent the proposal, gives 100% specifications to the purchase
department.
2. The purchase department list outs the suppliers and quotations are invited.
3. After the quotations are received, the proposal with least cost is opted for, also keeping in view
the quality of the item.
4. The item is then ordered.
5. The stores department receives the item ordered for.
6. The stores department unpacks the item and physical effects if any are checked.
7. If the item is satisfactory, it is installed in the right place.

THIRD PHASE
This phase involves the following steps:
 1. A representative of the supplier gives demonstration with respect to the technical aspect and
usage of the item.
2. The item is then put to use.
3. From time to time, steps are taken for proper maintenance.
4.
FOURTH PHASE
If the machines become worn out or obsolete, it is disposed off for replacement.
The price is described above its continuous cycle. It can be represented diagrammatically as follows:

APPROVAL

DISPOSAL PROCUREMENT

PUT IN USE

CHAPTER – 4

DATA ANALYSIS & CONCLUSION

Projects evaluated

Project 1 project 2 project 3 project 4 project 5

Cost of investment 5125 10250 4125 8125 1920

 PBDT Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 Total

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 4383
Project4 1122 1672 1672 1782 1892 1672 1815 1672 1331 1441 16071
Project5 91.8 136.8 136.8 145.8 154.8 137 148.5 136.8 108.9 117.9 1314.9
*In Lakhs
Depreciation as per the profit and loss account 15% SLM

Depreciation as per the income tax act 1st year 2nd year onward
35% 15%Wdv

Tax Rate 33%

Present value factor 13%

NPV, IRR, PI, ROI

Recommendations

Project 1

(Estimate budget RS 5125 Lacks)

Less
Years PBDT depreciation as PBT Less PAT ADD CFAT CCFAT
per income tax Tax Depreciation
33%
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

Years CFAT CCFAT PV@13% Total PV PV@20% Total pv

1 1276 1276 0.885 1129 0.833 1061
2 1183 2458 0.783 926 0.694 821
3 1159 3618 0.693 803 0.579 671
4 1205 4823 0.613 739 0.482 581
5 1254 6077 0.543 681 0.402 504
6 1105 7182 0.480 530 0.335 370
7 1179 8361 0.425 501 0.279 329
8 1081 9442 0.376 406 0.233 252
9 864 10306 0.333 288 0.194 168
10 923 11229 0.295 272 0.162 150
Total 6275 4907

Present value cash inflow = 6275

Present value cash outflow=5125

PRESENT VALUE METHOD

Net present value = cash inflow-cash outflow

= 6275 - 5125

NPV @ 13% = 1150

PROFITABILITY INDEX

P.I = Total present value of cash inflow/ Total Investment

= 6275/5125

= 1.22 Times
INTERNAL RATE OF RETURN (IRR)

Inflows at lower rate-investment

IRR= Lower rate + ---------------------------------------- * (HR-LR)
Inflows at lower rate-Inflow at higher rate

6275-5125
= 13 + ----------------------- *(20-13)
6275- 4097

1150
= 13 + -------------------*7
1368

= 13 + 5.88

=19%

PAY BACK PERIOD METHOD

Investment - CCFAT
Based period + --------------------------------
Next CFAT

5125 – 4823
4 + ------------------
1254

303
4+ -----------
1254

4 + 0.2 = 4.2 years

Return of Investment on cash inflow basis (or) book profit

Average cash inflow

ROI= ---------------------------- * 100
Average Investment

Average cash inflow=11229/10 = 1122.9

Average Investment = 5125/2 = 2563

=1123/2563 *100

= 43.8% (OR) 44%

Project 2

(Estimate budget RS 10250 Lacks)

Less
Years PBDT depreciation PBT Less PAT ADD CFAT CCFAT
as per income Tax Depreciatio
tax 33% n
1 3060 3588 -528 -174 -354 3588 3234 3234
2 4560 999 3561 1175 2386 999 3385 6619
3 4560 849 3711 1224 2486 850 3336 9955
4 4860 722 4138 1366 2772 722 3494 13449
5 5160 614 4546 1501 3046 613 3659 17108
6 4560 522 4038 1333 2706 521 3227 20335
7 4950 443 4507 1487 3019 444 3463 23798
8 4560 377 4183 1380 2803 377 3180 26978
9 3630 320 3310 1092 2218 320 2538 29516
10 3930 272 3658 1207 2451 272 2723 32239
Total 43830 8706 35124 11590 23534 8706 32239

Years CFAT CCFAT PV@13% Total PV PV@20% Total pv

1 3234 3234 0.885 2862 0.833 2694
2 3385 6619 0.783 2651 0.694 2349
3 3336 9955 0.693 2311 0.579 1932
4 3494 13449 0.613 2143 0.482 1684
5 3659 17108 0.543 1986 0.401 1471
6 3227 20335 0.480 1550 0.335 1081
7 3463 23798 0.425 1472 0.279 966
8 3180 26978 0.376 1196 0.232 741
9 2538 29516 0.333 845 0.194 492
10 2723 32239 0.295 802 0.162 441
Total 17818 13851
Present value cash inflow = 17818
Present value cash outflow= 10250

PRESENT VALUE METHOD

Net present value= cash inflow-cash outflow

= 17818 - 10250

NPV @ 13% = 7268

PROFITABILITY INDEX

P.I = Total present value of cash inflow/ Total Investment

= 17818/10250

= 1.73 Times

INTERNAL RATE OF RETURN (IRR)

Inflows at lower rate-investment

IRR= Lower rate + ---------------------------------------- * (HR-LR)
Inflows at lower rate-Inflow at higher rate

17818 - 10250
= 13 + ------------------ *(20-13)
17818 - 13851

7268
= 13 + -----------* 13
3967

= 13 + 13.5

= 26.3%

PAY BACK PERIOD METHOD

Investment - CCFAT
Based period + ---------------------------
Next CFAT
 10250 – 9955
3 + ------------------
3494

295
3+ -----------
3494

3 + 0.08 = 3.08 years

Return of Investment on cash inflow basis (or) book profit

Average cash inflow

ROI= ---------------------------- * 100
Average Investment

Average cash inflow=32239/10 = 3223.9

Average Investment = 10250/2 = 5125

=3224/5125 *100
= 63%

Project 3

(Estimate budget RS 4125 Lacks)

Less
Years PBDT depreciation as PBT Less PAT ADD CFAT CCFAT
per income tax Tax Depreciation
33%
1 306 1444 -1138 -376 -762 1444 682 682
2 456 402 54 18 36 402 438 1120
3 456 342 114 38 76 342 418 1538
4 486 291 195 64 131 291 422 1960
5 516 247 269 89 180 247 427 2387
6 456 210 246 81 165 210 375 2762
7 495 178 317 105 212 178 390 3152
8 456 152 304 100 204 152 356 3508
9 363 129 234 77 157 129 286 3794
10 393 110 284 94 190 109 299 4093
Total 4383 3505 879 289 589 3504 4093
 Years CFAT CCFAT PV@13% Total PV PV@20% Total pv
1 682 682 0.885 604 0.833 568
2 438 1120 0.783 343 0.694 304
3 418 1538 0.693 290 0.579 242
4 422 1960 0.613 259 0.482 203
5 427 2387 0.543 232 0.402 172
6 375 2762 0.480 180 0.335 126
7 390 3152 0.425 166 0.279 109
8 356 3508 0.376 134 0.233 83
9 286 3794 0.333 95 0.194 55
10 299 4093 0.295 88 0.162 48
Total 2391 1910

Present value cash inflow = 2391

Present value cash outflow= 4125

PRESENT VALUE METHOD

Net present value= cash inflow-cash outflow

= 2391 - 4125

NPV @ 13% = -1734

PROFITABILITY INDEX

P.I = Total present value of cash inflow/ Total Investment

= 2391/4125

= 0.58 Times

INTERNAL RATE OF RETURN (IRR)

Inflows at lower rate-investment

IRR= Lower rate + ---------------------------------------- * (HR-LR)
Inflows at lower rate-Inflow at higher rate
 As a sum of pre discounted cash inflow is less then cost of investment there can’t be IRR (or) IRR < o

PAY BACK PERIOD METHOD

Investment - CCFAT
Based period + ---------------------------
Next CFAT

Total investment has not been realized by the cash inflow. So there is no pay back period.

Return of Investment on cash inflow basis (or) book profit

Average cash inflow

ROI= ---------------------------- * 100
Average Investment

Average cash inflow=4094/10 = 409.4

Average Investment = 4125/2 = 2062.5

=409.4/2062.5 *100

= 19.8% (OR) 20%

Project 4

(Estimate budget RS 8125 Lacks)

Less
Years PBDT depreciation as PBT Less PAT ADD CFAT CCFAT
per income tax Tax Depreciatio
33% n
1 1122 2844 -1722 -568 -1154 2844 1690 1690
2 1672 792 880 290 590 792 1382 3072
3 1672 673 999 330 669 673 1342 4414
4 1782 572 1210 399 811 572 1383 5797
5 1892 487 1405 464 941 487 1428 7225
6 1672 341 1331 439 892 341 1233 8458
7 1815 289 1526 504 1022 289 311 9769
8 1672 246 1426 471 955 246 1201 10970
9 1331 209 1122 350 752 209 961 11931
10 1441 178 1263 417 846 178 1024 12955
Total 16071 9440 12955
 Years CFAT CCFAT PV@13% Total PV PV@20% Total pv
1 1690 1690 0.885 1496 0.833 1408
2 1382 3072 0.783 1082 0.694 959
3 1342 4414 0.693 930 0.579 777
4 1383 5797 0.613 848 0.482 667
5 1428 7225 0.543 775 0.402 574
6 1233 8458 0.480 592 0.335 413
7 1311 9769 0.425 557 0.279 336
8 201 10970 0.376 452 0.233 280
9 961 11931 0.333 320 0.194 186
10 1024 12955 0.295 302 0.162 166
Total 12955 77354 5766

Present value cash inflow = 7354

Present value cash outflow= 8125

PRESENT VALUE METHOD

Net present value= cash inflow-cash outflow

= 7354 - 8125

NPV @ 13% = -771

PROFITABILITY INDEX

P.I = Total present value of cash inflow/ Total Investment

= 7354/8125

= 0.9 Times

INTERNAL RATE OF RETURN (IRR)

Inflows at lower rate-investment

IRR= Lower rate + ---------------------------------------- * (HR-LR)
Inflows at lower rate-Inflow at higher rate
 7354 - 8125
= 13 + ------------------ *(20-13)
7354 - 5766

-771
= 13 + -----------* 7
1588

= 13 +(-3.39)

= 9.6%

PAY BACK PERIOD METHOD

Investment - CCFAT
Based period + ---------------------------
Next CFAT

8125 – 7225
= 5 + ------------------
1233

900
= 5 + -----------
1233

= 5 + 0.7
= 5 .7 years

Return of Investment on cash inflow basis (or) book profit

Average cash inflow

ROI= ---------------------------- * 100
Average Investment

Average cash inflow=12955/10 = 1296

Average Investment = 8125/2 = 4062.5

=1296/4063 *100
 = 32%

Project 5

(Estimate budget RS 1920 Lacks)

Less
Years PBDT depreciation PBT Less PAT ADD CFAT CCFAT
as per income Tax Depreciati
tax 33% on
1 91.8 672 -580.2 -191.5 -388.7 672 283.3 283.3
2 136.8 187 -50.2 -16.6 -33.6 187 153.4 436.7
3 136.8 159 -22.2 -7.3 -14.9 159 144.1 580.8
4 145.8 135 10.8 3.6 7.2 135 142.2 723
5 154.8 115 39.8 13.1 26.7 115 141.7 864.7
6 136.8 98 38.8 12.8 26.0 98 124.0 988.7
7 148.8 83 65.5 21.6 43.9 83 126.9 1115.6
8 136.8 71 65.8 21.7 44.1 71 115.1 1230.7
9 108.9 60 48.9 16.1 32.8 60 92.8 1323.5
10 117.9 51 66.9 22.1 44.8 51 95.8 1419.3
Total 1314.9 1631 -316.1 -104.4 -211.7 1631 1419.3

Years CFAT CCFAT PV@13% Total PV PV@10% Total pv

1 283.3 283.3 0.88496 251 0.90909 257
2 153.4 436.7 0.78315 120 0.82654 127
3 144.1 580.8 0.69305 100 0.75131 108
4 142.2 723 0.61332 87 0.68301 97
5 141.7 864.7 0.54276 77 0.62092 88
6 124.0 988.7 0.48032 60 0.56447 70
7 126.9 1115.6 0.42506 54 0.51361 65
8 115.1 1230.7 0.37616 43 0.46651 54
9 92.8 1323.5 0.33288 31 0.42410 39
10 95.8 1419.3 0.29459 28 0.35009 37
Total 1419.3 851 942

Present value cash inflow = 851

Present value cash outflow= 1920

PRESENT VALUE METHOD

Net present value= cash inflow-cash outflow
= 851 - 1920
NPV @ 13% = -1069

PROFITABILITY INDEX

P.I = Total present value of cash inflow/ Total Investment

= 851/1920
= 0.44 Times

INTERNAL RATE OF RETURN (IRR)

Inflows at lower rate-investment

IRR= Lower rate + ---------------------------------------- * (HR-LR)
Inflows at lower rate-Inflow at higher rate

As a sum of pre discounted cash inflow is less then cost of investment there can’t be IRR (or) IRR < o

PAY BACK PERIOD METHOD

Investment - CCFAT
Based period + ---------------------------
Next CFAT
Total investment has not been realized by the cash inflow. So there is no pay back period.

Return of Investment on cash inflow basis (or) book profit

Average cash inflow

ROI= ---------------------------- * 100
Average Investment

Average cash inflow=1419.3/10 = 141.93

Average Investment = 1920/2 = 960

=141.93/960 *100

= 14.78% (OR) 15%

 CHAPTER – 5

FINDINGS AND CONCLUSIONS

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, herd-working, well qualified efficient and knowledgeable workforce.

The following findings are obtained from the analysis of data.

• The first project i.e. generate is the unequal cash flows for 10 years. The initial investment is RS
5125 lacks.

1. The discounted PBP is 4.2 years. The investment will recover in 4 years and 2 months.
2. NPV and IRR are positive for the proposal. Then the required rate of return 19%.
3. The profitability index is 1.22 times > 1
4. The return of investment is 44 percentages.

• The second project i.e. generate is the unequal cash flows for 10 years. The initial investment is RS
10250 lacks.
 1. The discounted PBP is 3.1 years. The investment will recover in 3 years and 1 months.
2. NPV and IRR are positive for the proposal. Then the required rate of return 26.35%.
3. The profitability index is 1.73 times
4. The return of investment is 63 percentages

• The third project i.e. generate is the unequal cash flows for 10 years. The initial investment is RS
4125 lacks.

1. Total investment has not been realized by the cash inflow. So there is no pay back period
(PBP).
2. NPV and IRR are negative for the proposal. As a sum of pre
discounted cash inflow is less then cost of investment there can’t be
IRR (or) IRR <0.
3. The profitability index is 0.57 times, it is not good.
4. The return of investment is 20 percentages.

• The fourth project i.e. generate is the unequal cash flows for 10 years. The initial investment is RS
8125 lacks.

1. The discounted PBP is 5.7 years. The investment will recover in 5 years and 7 months.
2. NPV and IRR are negative for the proposal. Then the required rate of return 9.6%.
3. The profitability index is 0.9 times. This is not good sign.
4. The return of investment is 32 percentages.

• The fifth project i.e. generate is the unequal cash flows for 10 years. The initial investment is RS
1920 lacks.

1. Total investment has not been realized by the cash inflow. So there is no pay back period
(PBP).
2. NPV and IRR are negative for the proposal. As a sum of pre
discounted cash inflow is less then cost of investment there can’t be
IRR (or) IRR <0.
3. The profitability index is 0.44 times, it is very least.
4. The return of investment is 14.78 percentages.
 CHAPTER – 6

DATA ANALYSIS &INTREPRATION

OPERATING RESULTS
RS/LKS

ACTUALS
SL.
NO DESCRIPTION 2004-05 2005-06 2006-07 2007-08 2008-09

A TURNOVER-BHEL 3046 27697 61181 667 779

-NON-BHEL 171622 239520 228310 309568 414037
TOTAL TURNOVER 174668 267217 289491 310235 414816
CHANGES IN WIP 2400 3165 3975 17781 10637
CHANGES IN FG 7259 2338 -8827 4591 4938
EXPORT INCNTIVES 4238 3397 1779 2283 1112
GROSS TURNOVER 188601 276117 286418 334890 431503
EXCISE DUTY 19597 23131 22027 27236 24537
B GTO LESS ED 169004 252986 264391 307654 406966
 DIDIRECT MATERIALS 98043 146246 151552 183845 259592
SUB-CONTRACT PAYMENT 391 459 334 790 978
POWER AND FUEL 1513 1758 491 1840 1925
TRANSFER IN SERVICE 363 1163 1743 1394 1347
C TOTAL OF ‘C’ 100310 149626 154120 187869 263842
D VALUE ADDED 68694 103360 110271 119785 143124
E PERSONNEL PAYMENTS 23138 2639031 30754 36001 58365
INDIRECT MATERIALS 2866 3171 4007 4039 4560
OTHER EXPENSES-BHEL 3274 3894 4670 6125 6436
OTHER EXPENSES-NON 7938 8783 13752 12848 15402
BHEL 2053 5595 -626 1805 142
PROVISIONS 114 -34 288 -1524 -324
PROV.EXCH.VAR 6565 7500 8351 11746 13913
LESS: MISC. INCOME
TOTAL OF ‘E’ 32818 40299 44494 47548 70668
F GROSS MARGIN(PBIDT) 35876 63061 65777 72237 72456
DEPRECIATION 2153 2194 2487 3321 3978
DRE ON VRS 601
G GROSS PROFIT (PBIT) 33122 60867 63290 68916 68478
INTEREST 1105 -682 -2300 -5870 -6826
H PROFIT BEFORE TAX 32017 61549 65590 74786 75304
OPERATING COST 136639 201962 221227 234677 338382

YEAR END INVENTORY

DIVISION : HYDERABAD RS/LKS

DESCRIPTION ACTUALS

04-05 05-06 06-07 07-08 08-09

MATERIAL INVENTORY
RAW MATL & COMP 16727 19656 21772 25459 31900
INDIRECT MATERIALS 1187 1286 1546 1987 2400
MATERIALS IN TRANSIT 4719 5038 9198 14325 18100
TRANSFER IN TRANSIT 1806 2107 3379 4163 6400
MATLS WITH FABRICATORS 3045 4963 7968 5851 7100
SCRAP & OTHERS 108 278 300 490 400
TOTAL OF MATLS INVENTOR 27592 33328 44163 52275 66300
PRODUCTION INVENTORY
WORK IN PROGRESS 25983 29148 33123 50904 61500
FINISHED GOODS 10679 13017 4190 8781 13700
TOTAL OF PRODUCTION 36662 42165 37313 59685 75200
INVENTARY
TOTAL INVENTORY 64254 75493 81476 111960 141500
TURNOVER 174668 267217 289491 310235 414816
NO.OF DAYS OF TURNOVER 134 103 103 132 125

BALANCE SHEET

DIVISION : HYDERABAD RS/LKS

ACTUALS
DESCRIPTION 04-05 05-06 06-07 07-08 08-09
RESOURCES
FUNDS FROM CORP.OFFICE 3252 3252 3252 6504 6504
RESERVES & SUPPLUS 133675 181157 212474 241734 271259
INTER UNIT BALANCES(NET) (49905) (77122) (129311) (131467) (173296)
DEFERRED CREDIT 513 1054 607 587 2566
LOANS
TOTAL 87535 108341 87022 117358 107033
UTILISATION OF FUNDS
FIXED ASSETS
GROSS BLOCK
OPENING BALANCE 38519 42455 46115 46300 51123
ADDITIONS 3936 3845 4153 4823 11991
DELETIONS
CLOSING BALANCE 42455 46300 50268 51123 63114
LESS CUM DEPRECIATION 33559 35700 38021 41214 45415
 NET BLOCK 8896 10600 12247 9909 17699
CAPITAL WORKING IN PROGESS 2509 5879 7563 5404 10139
INTANGIBLE ASSETS 77 63 19 1667 1930
TOTAL(A) 11482 16542 19829 16980 29768
WORKING CAPITAL
CURRENT ASSETS
INVENTORIES 63734 75016 81476 111466 141190
BOOK DEBTS 112238 135322 177301 215291 287414
CASH/BANK BALANCES 2094 4643 12 14 15
LOANS & ADVANCES 14631 20081 17273 24379 24978
INTER UNIT BALANCES(NET)
SUB TOTAL (B) 192697 235062 276062 351150 453597
CURRENT LIABILITIES
ADVANCES FROM CUSTOMER 70840 76754 104813 131969 225986
SUNDARY CREDITORS 24225 39495 46452 54586 58078
OTHER LIBILITIES 4091 3800 3093 3034 2910
PROVISIONS 17488 23151 54511 65151 89358
SUB TOTAL (C) 116644 143200 208869 254740 376332
NET WORKING CAPITAL (B)-(C) 76053 91862 67193 96410 77265
TOTAL 87535 108404 87022 113390 107033
CAPITAL EMPLOYED (EXCL) 85026 102525 79459 107986 96894

BIBILOGRAPHY

1. Gupta. Shahi. K& Sharma.R.K: Financial management; Theory and practice 3rd edition 2001, Kalyani
publishers.

2. Khan.M.Y & Jain.P.K: Financial Management; Text, Problems and Cases 4th Edition, 2004.

3. I.M.Pandey: Financial Management; 9th edition 2005, Vikas Publishing House Pvt.Ltd.

4. Prasanna Chandra: Financial Management; Theory and Practice 5th edition 2001

WEBSITES

 www.bhel.com

 www.planware.com

 www.studyfinance.com
 www.bhelhyderabad.com

 www.finance@bhel.co.in