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MBA ACADEMIC PROJECTMBA ACADEMIC PROJECTMBA ACADEMIC PROJECTMBA ACADEMIC PROJECTMBA ACADEMIC PROJECTMBA ACADEMIC PROJECTMBA ACADEMIC PROJECTMBA ACADEMIC PROJECTMBA ACADEMIC PROJECTMBA ACADEMIC PROJECTMBA ACADEMIC PROJECTMBA ACADEMIC PROJECTMBA ACADEMIC PROJECTMBA ACADEMIC PROJTRANSCRIPT
CHAPTER – I
INTRODUCTION
1
INTRODUCTION:
As per the curriculum of Sri Venkateswara University, every MBA student has to
undergo an Iindustrial Training in any industry/organization of his/her choice.
During the course of training period, every student gets a golden opportunity to get
practical training in an organization/industry. I am fortunate enough to get this opportunity of
undergoing training in BHEL, Hyderabad which is a public sector company engaged in
producing heavy electrical machinery, turbines and equipments.
BHEL is the key industry in the Indian economy meeting the crucial power needs of the
country.
To win the competitive edge, every organization is much concentrating on the financial
aspect of development. A finance manager’s job begins even before a business actually comes
in to actions and continues till the very end.
The activities of finance manager include procurement of funds from various resources,
determining where to invest, the extent of investment and analysis of overall performance of the
organization.
In the area of finance, I have chosen the project work on Capital Budgeting because it is
the most crucial financial decision of a firm. It relates to the selection of an asset or investment
proposal or course of action whose benefits are likely to be available in future over the lifetime
of the project.
The following aspects of capital budgeting has inspired me to take up the topic:
Capital budgeting decision involves critical analysis of risk / return.
The benefits from the investment proposal deferred in to the future with an immediate
cash flow / commitment.
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MEANING:
Capital budgeting decision refers to assets that are in operations and yield a return over
a period of time, usually exceeding one year. It is a long-term investment decision involving
huge capital expenditures.
The main characteristics of a capital expenditure are that the expenditure is incurred at
one point of time whereas benefits of the expenditure are realized at different points of time in
future.
Capital budgeting process involves planning, availability and controlling, allocation and
expenditure of long-term investment funds.
The following are some of the examples of capital expenditure:
1. Cost of acquisition of permanent assets such as land and building plant and machinery,
goodwill etc.
2. Cost of addition, expansion, improvement or alteration in the fixed assets.
3. Cost of replacement of permanent assets.
4. Research & Development Projects costs, etc.
DEFINITIONS:
Charles T. Horn green has defined Capital Budgeting as “Capital Budgeting is long-
term planning for making and financing proposed capital outlays.”
In the words of Lynch, “Capital Budgeting is concerned with planning and development
of available capital for the purpose of maximizing the long-terms profitability of the
concern.”
3
OBJECTIVES OF THE STUDY:
The case study “CAPITAL BUDGETING AND INVESTMENTS APPRAISAL OF
BHEL” undertaken with the following objectives:-
To study the Capital Budgeting system in BHEL, Ramachandrapuram Hyderabad.
To study its impact of the future of the company.
To understand the various kinds of Capital Budgeting to the problems faced by the
organization.
To outline the factors and consideration that goes in to making a capital investment
decision.
To understand the various methods, for determining the size of the capital budget and
evaluating investment proposals.
To appreciate the good points and to find out drawbacks of each methods while
evaluating.
To have an insight in to the various intricacies of discounted cash flows methods.
To analyze the strengths and weaknesses of existing process in capital budgeting.
To measure the profitability of the project by considering all cash flows.
To make recommendations and to improve further process of capital budgeting.
SOURCES OF DATA:4
PRIMARY DATA
Interaction with the Planning and Development Department.
Interaction with the Finance Department
SECONDARY DATA
Capital Budgeting manual of BHEL.
Accounting manuals of BHEL.
WWW.BHEL.COM
METHODOLOGY
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1. The Capital Budgeting mechanism is studied in detail.
2. The various factors of Capital Budgeting management are studied in detail.
3. The technical analysis in respect to Internal Rate of Return (IRR), Net Present Value
(NPV) and Discounted Cash Flow techniques has been studied.
FRAME WORK OF THE STUDY
The entire study is organized in the five chapters.
1. The first chapter of study contains introduction, objectives of the study, methodology
of the study, need for the study and limitations of the study.
2. The second chapter includes the profile of BHARAT HEAVY ELECTRICALS
LIMITED.
3. The third chapter concentrates on the theoretical aspects of the Capital Budgeting. It
includes capital budgeting approaches and risk and uncertainty in the capital budgeting.
4. And in depth study of Capital Budgeting of BHEL, Ramachandrapuram Hyderabad is
presented in the fourth chapter.
5. And the last chapter concluded the study with data analysis and interpretation with
findings and some suggestive measure for better performance.
6
LIMITATIONS
Financial matters are sensitive in nature, the same could not acquire easily.
The serious limitations of the study are the time factor.
Another limitation of the study is collecting data from finance department and
warehouse superiors were difficult as they were too busy in their own work.
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CHAPTER – II
COMPANY PROFILE
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COMPANY PROFILE
BHEL is one of the largest engineering and manufacturing enterprise in India and is one
of the leading international companies in the field of power. BHEL offers a wide spectrum of
products and services for core sectors like power generation, transmission and distribution,
industry, transportation, oil and gas, etc. besides supply of non-conventional energy systems.
Bharat Heavy Electricals Limited was established in the year of 1956. The company has
celebrated its Golden Jubilee in 2006. Its first plant was setup in Bhopal ushering in the
indigenous heavy electrical equipment industry in India, a dream that has been more than
realized with a well-recognized track record of performance. The company’s inherent financial
strengths can be seen from its net worth, debt equity ratio and cash surplus.
The company has a net worth of Rs. 6027 crores as on 31.03.2005. The Company’s
cash surplus stood over Rs. 3200 crores as on 31.032005 and its debt equity ratio is at 0.09.
It has been earning profit continuously since 1971-72 and achieved a sales turnover of
Rs. 10336.4 crores with a profit before tax of Rs. 1581.06 crores in 2004-05. Constant increase
in the Net Asset Value (NAV) per share indicates the intrinsic strength for the company. At the
end of the year 2004-05 outstanding orders in hand for execution in future, stand at over Rs.
3200 crores.
BHEL manufactures over 180 products under 30 major product groups and caters to core
sectors of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation,
Renewable Energy, etc. The wide network of BHEL’ s 14 manufacturing divisions, 4 Power
Sector Regional Centre’ s, over 100 Project Sites, 8 Service Centers, 18 Regional Offices and
one subsidiary enables the Company to promptly serve its customers and provide them with
suitable products, systems and services—efficiently and at competitive prices. The high level of
quality & reliability of its products is due to the emphasis on design, engineering and
manufacturing to international standards by acquiring and adapting some of the best technologies
from leading companies in the world, together with technologies developed in its own R&D
centers.
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BHEL Caters to core sectors of the Indian Economy:
1. Power Generation and Transmission,
2. Industry,
3. Transportation,
4. Renewable Energy,
ABOUT BHEL RAMACHANDRAPURAM UNIT:
As a member of the prestigious “BHEL” family”, BHEL – Hyderabad has earned a
reputation as one of its most important manufacturing units, contributing its lion’s share in
BHEL Corporation’s overall business operation.
The Hyderabad unit was setup in 1963 and started its operations with manfacture of
turbo-generator sets and auxiliaries for 60 and 110 MW thermal utility sets.
Over the years it has increased its capacity range and diversified its operations to
many other areas. Today, a wide range of products are manufacture in this unit, catering to the
needs of variety of industries like fertilizers & chemicals, petrochemicals & refineries, paper,
sugar, steel, etc.,
BHEL – Hyderabad unit has collaborations with world renowned MNC’s like M/S
General Electric, USA, and M/S Nuovo pig none, etc.
HISTORY OF BHEL
BHARAT HEAVY ELETRICALS LIMITED (BHEL) is one of the pioneers in
engineering industries in the world. The vital role played by the BHEL today in the country is
the mark of its continuous effects to improve the service in the nation by consultancy,
manufacturing and offering services in Power section.
The success story of BHEL how ever goes back to 1956 when its first plant was set up
in BHOPAL. Three major plants in Haridwar, Hyderabad and Tiruchirapally followed this.
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These plants have been the core of BHEL’ s effects to grow and diversify and become one of
the most Integrated Power and Industrial Equipment manufacturers in the world.
GROWTH OF BHEL
The Hyderabad Unit of BHEL is located at Ramachandrapuram, which is around 30Km
from the historic city of Charminar. Foundation Stone of the Plant was laid in 1959 and the
production commenced in the year 1965. The Unit was set up mainly to manufacture 60MW
and 110MW Steam Turbo-generator sets for State Electricity Board and also 12MW TG sets
from this small beginning, the Ramachandrapuram Unit has been growing steadily in different
phases of development and today it caters to a wide spectrum of business in Power,
Transmission, Industry, Oil and Gas. It now boasts the largest number of products under a
single roof as compared to any of the other BHEL Units.
REWARDS AND AWARDS
BHEL employee’s zeal to excel supported by the company’s constant encouragement
has also resulted in 52 of its employee’s winning a sizeable number of 40 prestigious
Prime Minister’s Shram Awards.
BHEL employees being conferred one of the country’s highest civilian honors –
‘Padma Shri’ for the years 2005 and 2006, by the President of India.
BHEL bags ICWAI National Award for excellence in Cost Management.
EEPC’s Top export award conferred on BHEL for the 17th Consecutive year.
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ACHIEVEMENTS
BHEL has already attained ISO 9000 and all the major units and divisions of BHEL
have been upgraded to the latest ISO-9001:2000 version quality standard certification for
quality management.
All the major units or divisions of BHEL have been awarded ISO-14001 certification
for environmental management systems and OHSAS-18001 certification for occupational
health and safety management systems.
BHEL has achieved substantial savings of Rs. 1770 million during fiscal 2006-07, as a
result of the implementation of an improvement projects rewards scheme (IMPRESS).
Outbidding a Chinese multinationals in an open global tender, BHEL has won an order
for a turbo Blower package from Rashtriya Ispat Nigam Limited (RINL) valued at over Rs.
1060 million.
BHEL’s power generating sets achieved record generation in first nine months of 2006-
07. 87% of the coal based sets and 100% of nuclear sets added in the country during the year
were of BHEL make.
BHEL commissions India’s largest Solar-Diesel Hybrid Power Plant in Lakshadweep.
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CONTRIBUTIONS OF DIFFERENT SECTORS
POWER GENERATION:-
Power generation sector comprises of thermal, gas, hydro and nuclear power plant
business.
BHEL has proven turnkey capabilities for executing power project from concept to
commissioning. It possesses the technology and capability to produce thermal sets with super
critical parameters up to 100 MW units rating and gas turbine generator set of up to 250 MW
unit rating. Co-generating and combined – cycle plants have been introduced to achieve higher
plant efficiencies. To make efficient use of high – ash – content coal available in India, BHEL
also supplies circulating fluidized bed combustion boilers for thermal plants.
The company manufactures 220/235/500 MW nuclear turbine - generator sets. Custom
made hydro sets of Francis, and Kaplan types for different head discharge combinations also
engineered and manufactured by BHEL.
INDUSTRIES:-
BEHL is a major contributor of equipment and systems to industries: Cement, Sugar,
Fertilizer, Refineries, Petrochemicals, Paper, Oil and Gas, Metallurgical and other process
industries. The range of systems and equipment supplied includes.
Captive power plants, Co-generation plants, DG power plants, Industrial boilers and auxiliaries,
waste heat recovery boilers, Gas turbines, Heat Exchangers and pressure vessels, Coal and ash
handling plants, Centrifugal compressors, Electrical machines? Pumps, Valves, Seamless steel
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tubes, Electrostatic precipitators, Fabric filters, Reactors, Fluidized bed combustions boilers,
Chemical recovery boilers, Process controls and Material handling systems.
TRANSPORTATION:-
BHEL is involved in the development, design, engineering, marketing, production,
installation, and maintenance and after-sales service of rolling stock and fraction propulsion
systems. In the area of rolling stock, BHEL manufactures electric.
Locomotives up to 5000 Hp, diesel electrical locomotives from 350 Hp to 3100Hp, both
for mainline and shunting duty applications.
BHEL is also producing rolling stock for special applications viz., overhead equipment
cars, special well wagons, rail-cum-road vehicle, etc.
Besides traction propulsion systems for in-house use, BHEL manufactures traction
propulsion for other rolling stock producers of electric locomotives, diesel electric locomotives,
electric multiple units and metro cars.
RENEWABLE ENERGY:-
Technologies that can be offered by BHEL for exploiting non-conventional and
renewable sources of energy include: wind electric generators, solar photo voltaic systems,
stand alone and grid-interactive solar power plants, solar heating systems, solar lanterns and
battery-powered road vehicles. The company has taken up R&D efforts for development of
multi-junction amorphous silicon solar cells based systems. BHEL also undertakes projects in
the area of distributed power covering small hydro and gas engine based generation systems.
OIL AND GAS:-
BHEL is a major contributor to the oil and gas sector industry in the country. BHEL’s
product range include Deep Drilling Oil Rigs, Mobile Rigs, Work Over Rigs, Well Heads and
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X-Mass Trees (of up to 10,000 PSI rating), Choke and Kill-manifolds, Full Bore Gate Valves,
Mud Valves, Mudline Suspension Systems, etc. BHEL is the single largest supplier of Well
Heads, X-Mass Trees and Oil Rigs to ONGC and OIL.
TRANSMISSION AND DISTRIBUTION:-
BHEL offers wide-ranging products and systems for T and D applications. Products
manufactured include: Power transformers, Instrument transformers, Dry type transformers,
Series and shunt reactors, Capacitors banks, Vacuum and SF6 circuit breakers, Gas insulated
switchgears, Energy meters, SCADA systems and insulators.
BHEL has indigenously developed state-of-art controlled shunt reactors and 400 KV
FACTS (Flexible AC Transmission Systems). The company undertakes comprehensive
projects to reduce Ate losses in distributions systems.
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PRODUCT PROFILE
PRODUCTS
BHEL manufactures a wide range of Power Plant Equipments and also caters to the
industry sector.
The products profile includes
Gas Turbines
Steam Turbines
Compressors
Turbo Generators
Pumps
Pulverizers
Switchgears
Solar Water Heating Systems
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Oil Rigs
Electrics for Urban Transportation System
BHEL – The largest Turbines manufacturer in India, with the stated – of - art Facilitates
in all area of Gas Turbines manufacture provide complete engineering in house for meeting,
specific customer requirement.
With over 100 machines and cumulative fired hours of over four million hours, BHEL
has supplied gas turbines for variety of applications in India and abroad. BHEL also has the
world’s largest experience of firing highly volatile naphtha fuel on heavy-duty gas turbines.
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BHEL has the capacity to design, manufacture and commission steam turbines of up to
1000 MW rating for steam parameters ranging from 30 bars to 300 bars pressure and initial &
reheat temperatures up to 6000 C. Steam Turbines are manufactured under technical
collaboration with Siemens, Germany covering the whole range of requirements for Drive,
Cogeneration, Captive Power, Utility and Combined Cycle applications. BHEL today, is fully
equipped to provide comprehensive services to clients covering system engineering,
equipments design, and turnkey erection and commissioning.
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BHEL made its foray into Centrifugal Compresses in the year 1970 with technical
collaboration from Nuova Pignone, Italy and since then has been catering to the Fertilizers,
Refmery Petrochemical and other process industries. BHEL today, has build up a cumulative
experience of more than 30 million hours of operation for various applications.
BHEL offers CENTRIFUGAL compressors for pressures as high as 350KglCm2 and
flows up to 350,000 Nm3/Hr. BHEL has the unique capability of offering the Compressor with
any kind of drive being a manufacturer of Gas Turbines, Steam Turbine as well as Motors and
can offer the Compressor station fully tested as per the requirements.
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BHEL offers total package of Compressor with its drive and all the associated
auxiliaries which includes inter-stage coolers, separators, lube oil and sealing systems, anit-
surge control systems, instrumentation and controls and process gas and cooling water piping
for supporting the compressor for continuous and trouble free operation.
Compressors are made as per API Standards/Specifications as
API 610 Centrifugal Pumps
API 611 Auxiliary Steam Turbine
API 612 Drive Steam Turbines
API 613 Gearbox
API 614 Oil Systems
API 616 Drive Gas Turbines
API 617 Centrifugal Compressors
API 670 Instrumentation
API 671 Couplings
API 672 Packaged, Integrally geared
Compressors
API 676 Positive Displacements Pumps
IS 325 Auxiliary Electric Motors
ASME PTC 10 Performance Test
ASME Sec. VIII & IX Heat Exchangers
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BHEL presently has manufactured Turbo-Generators of rating up to 560 MW and is in
the process of going up to 660 MW. It has the capability to take up the manufacture of ratings
up to 1000 MW suitable for thermal power generation, gas based and combined cycle power
generation as well as for divers industrial applications like Paper, Sugar, Cement,
Petrochemical, Fertilizers, Rayon Industries, etc. Based on proven designs and know - how
based by over three decades of experience and accreditation of ISO 9001, the Turbo generators
is a product of high class workmanship and quality. Adherence to stringent quality – checks at
each stage has helped BHEL to secure prestigious global orders in the recent past from
Malaysia, Malta, Cyprus, Oman, Iraq, Bangladesh, Sri Lanka and Saudi Arabia. The successful
completion of the various export projects in a record time is a testimony of BHEL’S
performance.
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BHEL started manufacture of Pumps during the mid-sixties under technical
collaboration with M/s. Sigma Lutin, Czechoslovakia, to meet the requirements of 60 MW, 110
MW and 210MW thermal power stations, the scope of which was widened to meet the
requirements of power plants up to 500MW, with the help of another collaboration with Mis
Weir Pumps, U.K. BHEL has also made some in-house product development to gain spin off
benefits from the above collaborations as well as to develop new pumps to meet the
requirements of Combined Cycle Power Plants.
BHEL has undertaken a design up-gradation and retrofit of the existing 200 KHI Boiler
Feed Pumps Inside Stators with energy efficient hydraulics and cartridge design internals under
technical tie-up with Mis Sulzer Pumps, Germany and recommended the upgraded 200 KHI-S
Boiler Feed Pump to all customers of 110 MW & 210 MW P6wer Stations operating with the
earlier Czech design for increase of pump availability and reliability and also considerable
reduction in operational costs.
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Pulverizes
BHEL manufactures mills for pulverized coal fired Thermal and Industrial boilers.
BHEL till date has manufactured over 1200 bowl mills and over 100 tube mills, operating in
different coal fired Thermal power stations in India.
BHEL has absorbed technology from world leader M/s. Combustion Engineering
USA for bowl mills. The specific range - 583 XRP/XRS to 1043 XRP covers the-state-of-the-
art mills required for the Indian market and are supplied as Industrial boilers as-well-as Utility
boilers of 60 MW, 110 MW, 120 MW, 210 MW, 250 MW & 500 MW capacities.
To meet the requirement of very high ash content coal with high moisture, BHEL in
collaboration with M/s Stein Industry, France of the ALSTHOM group, manufactures Ball
Tube Mills for Tower-type Boiler as-well-as conventional Boiler. These are horizontal mills
that grind coal by impact and attrition. They do not lose any of their grinding characteristics
with time, and provide constant fineness throughout the service life of their wear parts. They
are the only mills truly adapted to both, very abrasive high -ash coals and very low volatile
coals which require very fine grinding.
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Solar Water Heating Systems
Description:
BHEL a pioneer in the field of design manufacturing and installation of solar water heating systems (SWHS) in the country till date have installed systems covering more than 74,000 m2 of absorber area of capacity over 37Lakh liters per day. The largest over SWHS of 40000 LPD for space heating is in use at Dr. Willmar Schwa be India Pvt. Ltd. Noida.
Solar water heating systems are environmental friendly, pollution free equipments, harnessing the abundantly available Sun's energy. They find application at homes, hostels, hotels, and hospitals (swimming pool, bathing, washing, cleaning and cooking); in industrial process heating (Textile, Food processing, Pharmaceutical, Dyeing, Breweries, Metal Plating industries);
In the BHEL make Solar Collector, stabilized efficiency values up to 65% is assured under normal circumstances over a long period without degradation.
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Switchgears:-
BHEL is involved in the design, commissioning and service of a wide range of
Switchgears catering to various applications like power station auxiliaries, power distribution,
process industries, rural electrification, open cast mines, electric traction and other special
applications. BHEL started manufacturing circuit breakers in 1965 in collaboration with ASEA,
Sweden and to keep pace with the technological advancement and to meet customer
requirements, SF6 technology was introduced in 1981 in collaboration with Siemens, Germany
for manufacture of 145 kV to 420 kV class circuit breakers. BHEL also introduced Vacuum
Circuit Breakers in the range of 3.3 kV to 33 kV and the present range also includes the
indigenously developed and successfully tested 'Gas Insulated Switchgear' for 36 kV range.
Over 750000 Circuit Breakers of different media (Air, Oil, Vacuum and SF6) with
variety of operating drives (spring & hydraulic), supplied by BHEL are rendering trouble free
service all over the country and abroad. The switchgear designs are fully type tested as per the
I.E.C and I.S standards.
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Oil Rigs
BHEL started manufacturing oil field equipment in collaboration with M/s US Steel
Engineers and Consultants USA (National Oil Well), M/s Sky top Brewster USA, M/s Branham
Industries USA, M/s IRI International, and USA. After successful absorption of technology,
BHEL now has the capability to manufacture conventional deep drilling rigs up to a depth of
9000 meters, mobile rigs to a depth of 3000 meters and well servicing rigs to a well depth of
6100 meters. BHEL is authorized by the American Petroleum Institute (API) for manufacturing
products under specification API 4F, API 7K and API 8A.
BHEL also undertakes refurbishment, up gradation and renovation of the existing rigs
with the customers to provide better flexibility of operation for faster drilling, and higher
availability of rigs. BHEL, since the first order for oil rigs in 1977, has manufactured and
supplied 84 nos. drilling and well servicing rigs to both M/s ONGC Ltd. and M/s Oil India Ltd.
that are deployed for drilling and well servicing operations. In addition BHEL has upgraded 3
nos. rigs by installing Independent Rotary Drive system.
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1. Total inspection of rig equipment
2. Major overhauling of rig equipment
3. Supply of spares (for BHEL make rigs)
4. Refurbishment of rig equipment
5. Repairs on mast and substructures and reassessment of the structure
6. Up gradation of rigs
7. Supply and installation of Independent Rotary Drive system on the conventional drilling
rigs.
Electrics for Urban Transportation system:
12KV AC. 50HZ, Phase. Board gauge/mater gauge, Electrical multiply Units with DC
Drivers. 1500 VDC, broad gauge/meter gauge. Electric Multiple Units with DC Drives.
25 KV AC/1500 VDC broad gauge. Electric Multiple Units with 3 phase drives.
Diesel Electricity at Multiple Units.
Metro Railway.
Tram Cars.
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BHEL ORGANISATION VISION, MISSION AND OBJECTIVES
VISION
A world Class, Innovation, Competitive and Profitable Engineering Enterprise
Providing total Business Solutions.
MISSION
To be the leading Engineering Enterprise providing Quality products System and
services in the field of Energy, Transportation, Industry, Infrastructure and other potential areas.
VALUES
Meeting commitments made to External and Internal customers.
Faster learning, Creativity and Speed of response.
Respect for Dignity and potential of Individuals.
Loyalty and Pride in the Company.
Team playing.
Zeal to Excel.
Integrity and Fairness in all matters.
Providing better human friendly envy.
Compliance with applicable legislation and regulations.
Meeting customer satisfaction.
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COMPANY OBJECTIVES GROWTH
To ensure a steady growth by enhancing the competitive edge of BHEL in
existing Business, new areas and International operation so as to fulfill National
expectations from BHEL.
PROFITABILITY
To provide a reasonable and adequate return on Capital employed, primarily
through improvements in Operational efficiency, Capacity Utilization and Productivity
and generate adequate internal resources to Finance the company’s growth. Confidence
in providing increased value for this money through International Standards of Product,
Quality, Performance and superior customer services.
TECHNOLOGY
To achieve Technology excellence in operations by development of Indigenous
Technologies to and efficient absorption and adaptation of Imported Technologies to
suit Business needs and priorities and provide a competitive advantage of the company.
IMAGE
To fulfill the expectation which stock holders like Government as own,
employees, customers and the country at large have from BHEL.
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CHARECTERSTICS
Public sector, because the company under taken by Government.
Government share capital is 67% remaining amount invested by general public.
Manufactured heavy electrical equipments.
Indian company, because company name started with Bharat.
Transformation of the goods to other manufacturing company not to directed customer.
The company restricted by companies act, 1956.
CUSTOMER SATISFACTION
By providing better quality products, services and systems it can enables the company to
promptly serve its customers & provide them with suitable products, systems & services –
efficiently and at competitive prices.
SWOT ANALYSIS OF BHEL
The strength, Weaknesses, Opportunities and Threats which are being experienced by
BHEL as a growing concern have been summarized up in the following lines.
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STRENGTHS
BHEL has skilled, flexible, technical, trained workforce who can adopt themselves to
the changes in the market.
BHEL has excellent state of art facilities.
BHEL is a well-established company with manufacturing wide variety of products and
services with a satisfactory record of customer satisfaction.
There are many engineers who are engaged in producing good quality product at
competitive prices and putting their best efforts to their extent possible in the production
process.
Product manufactured to International Quality.
Low labor Cost and Low manufacturing cost.
There is a good relationship between workers and management.
Rewards for outstanding performances.
WEAKNESSES
The company is not able to supply goods within promised delivery schedules. Hence,
cost of production increases.
Because organization is very old, some of the employees do not know how to operate
the system.
System facility is inadequate.
No Financial package.
Slippage in delivery commitments.
Stress among high cadre employees.
Inadequate compensation package to employees.
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OPPORTUNITIES
Growing Power Sector Machinery.
Liberalization has opened up the market.
Navratna company status.
Dominant player in Domestic Market.
Expert potential growing.
THREATS
The government is liberalizing the policy of imports and licensing the production equipment to the private sector. Hence, competition is increasing.
MNC’s taking away good employees with attractive packages.
Government taxation policy – against manufacturing sector increases the price of the
product.
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CHAPTER – III
THEORITICAL ASPECTS OF
CAPITAL BUDGETING
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CAPITAL BUDGETING
Business firms have scarce resources that must be allocated among competitive uses.
The financial management provides a framework for firms to take these decisions widely.
The investments decision includes not only those that create revenues and profits but
also those that reduce cost. So,the investments decisions and the decisions relating to assets
composition of the firm.
A capital expenditure, from the accounting point of view, is an expenditure that is
shown as an asset on the balance sheet. This asset, expect in the case of a one-depreciable asset
like land , is depreciated over its life in accounting the classification of an expenditure as capital
or revenue expenditure is governed by a certain conventions, by some provisions of law, and by
the management’s desire to enhance and depress reported profits. Often, outlays on R&D,
major advertising campaign, and reconditioning of plant and machinery may be treated as
revenue expenditure for accounting purposes, been though they are expected to generate a
stream of benefits in future and therefore, quality or being capital expenditure.
CAPITAL BUDGETING FEATURES
1. They have long-term consequences
2. They often involve substantial outlay.
3. They may be difficult or expensive.
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FEATURES
1. It involves exchange of current funds for the benefits to be achieved in future.
2. Future benefits are expected to be realized over a series of years.
3. There is relatively high degree of risk.
4. They are invariable decisions.
5. They have long-term and significant effect on profitability of the concern.
6. They generally involve huge funds.
IMPORTANCE
Capital budgeting is of a paramount importance in financial decision-making. Capital
budgeting decision affects the profitability of the firm. They also have a bearing on the
competitive position of the enterprise. Capital budgeting decisions determine the future destiny
of the company.
An opportunity investment decision can yield spectacular returns where as an ill-advised
and incorrect investment decision can endanger the very survival even of the large sized
firms.
A capital expenditure decisions has its effect over a long-term time span and inevitably
affects the company’s future cost structure.
Capital investment decisions are not easily reversible, without much financial loss to the
firm.
Capital investment involves cost and the majority of the firms have scares capital
resources
Capital investment decisions are of national importance because of it determines
employment, economic activities and economic growth.
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NEED FOR CAPITAL BUDGETING:-
Capital budgeting decisions are vital to an organization as they include the decisions as
to.
Whether or not funds should be invested in long-term projects such as setting of an
industry, purchase of plant and machinery etc.
To analyse the proposal for expansion or creating additional capacities.
To decide the replacement of permanent asset such as building and equipments.
To make financial analysis of various proposals regarding capital investment so as
to choose the best out of many alternative proposals.
CAPITAL BUDGETING DECISION MAKING PROCESS
PROJECT GENERATION
DEVELOPING THE ALTERNATIVES
EVALUATION OF ALTERNATIVES
SELECTION OF THE PROJECT
IMPLEMENTATION
PERFORMANCE REVIEW
37
THERE ARE THREE TYPES OF CAPITAL BUDGETING
DECISIONS
1) Accept-reject decisions:
This is a fundamental decision capital budgeting. If the project is accepted, - the firm
invests in it. If the proposal is rejected, the firm does not invest in it so, by applying this
criterion, all independent projects are accepted. Independent projects are projects that do not
compete with one another in such a way the acceptance a project preclude the possibility of
acceptance of another.
2) Mutually exclusive projects decision:
These are projects, which, compete with other projects in such a way that the acceptance
of one will exclude the acceptance of other projects. The alternatives are mutually exclusive
and only one may be chosen. Mutually exclusive investment decisions acquired significance
when more than one proposal is acceptable under accept-reject criterion.
3) Capital rationing decisions:
Capital rationing refers to situation in which the firm has more acceptable investments
requiring greater amount of finance then is available with the firm. It is concerned with
selection of group of investment proposals actable under accept-reject criterion under financial
constraints.
38
EVALUATION OF INVESTMENT PROPOSLS
At each point of time a business firm has a number of proposals regarding various
number of projects in which it can invest funds. But funds available with the firms are always
limited and it not possible to invest in all the proposal at a time
In selecting the criterion, the following two fundamental principles must be kept into
view.
The bigger, the better principles: the principle means that other things being equal
bigger benefits are preferable to small ones.
The bird in hand principles: this principle means that other things being equal, early
benefits as other things are seldom equal.
39
TECHNIQUES OF CAPITAL BUDGETING:
The methods of appraising capital expenditure proposals can be classified in to two broad
categories:
1. Traditional or un discounted cash flow techniques
2. Discounted or time adjusted cash flow techniques
DISCOUNTED CASH FLOW METHODS:
The distinguishing characteristics of discounted cash flow capital budgeting
techniques are that they taking in to consideration the time value of money while evaluating the
cost and benefits of the project. They also take into consideration the benefits and cost
occurring during an entire life of the project.
1. NET PRESENT VALUE METHOD (NPV):
NPV may be defined as the summation of the present values of the cash proceeds in each
year minus the summation of the present values of the net cash outflows in each year.
The net present value (NPV) of a project is the sum of the present values of all the cash-
flows positive as well as negative that are expected to occur over the life of the projects.
The generally formula of NPV is:-
n
NPV of project = ∑ Ct ----- Initial investment
t=1(1+rt)t
Where Ct = Cash flow at the end of year t
Rt = Discounted rate for year t
40
The steps to be followed for adopting the NPV methods:
1) Determine an appropriate rate of the interest that should be selected as a
minimum required rate of return. This rate should be the minimum rate of return
below which the investor considers that does pay him the invested amount.
2) Compute the present value of total investment outlay; if the total investment is to
be made in the initial year, the present value shall be the same the cost of investment.
3) Compute the present value of total investment proceeds i.e. cash inflows at the
above determined discounted rate
4) Calculate the NPV of each project by subtracting the present value of cash out
flow for each project.
The present value of rupee 1 due in any number of years can be found by using the following
formula.
1
PV = -----
(1+r)t
Where : PV = Present value
r = rate of interest
t = number of years
ACCEPT OR REJECT CRITERION:
If NPV >ZERO, ACCEPT
If NPV< ZERO, REJECT
In case of mutually, exclusive projects, the various proposals would be ranked in order to
descending order. The proposal with higher NPV is to be accepted.
41
MERITS:
1) It recognizes the time value of money.
2) It is sound method of appraisal as it considers the total benefits arising out of the
proposal over its lifetime.
3) Changing discount rate can be built in to the NPV calculation by altering the
denominators. This rate normally changes because longer the time span, lower the value
of money and higher, the discount rate
4) This method is very useful for selection of normally exclusive projects.
DEMERITS:
A. It is difficult to calculate to understand
B. The present value method involves the calculation of required rate of return to
discount the cash flows, which present serious problems.
C. It is an absolute measure.
D. This method may not give satisfactory results in case of projects having different
effective lives.
42
2. INTERNAL RATE OF RETURN (IRR):
The internal rate of return (IRR) of a project is the discount rate, which makes its NPV
equal to “0”.Put differently, it is the discount rate, which equates the present value of future
cash flows with the initial investment. It is the value or r in the following equation:
n
Investment =∑ Ct
T=1(1+r)
Where:
Ct = Cash flow at the end of the year
r = internal rate of return (IRR)
t = life of the project
Applying following stapes can calculate IRR:
Step 1
Calculate cash flow after tax.
Step 2
Calculated fake payback period.
PBP=INITIAL INVESTMENT
AVERAGE CASH FLOWS
43
Step 3
Look for the factor in the present value annuity table in the year column until you arrive at
figure until you closest to the fake PBP
Step 4
Note the corresponding percentage.
Step 5
Calculate NPV at that percentage
Step 6
If NPV is positive take a rage higher and if NPV is negative take regret lower and once again
calculate NPV
Step 7
Continue Step5 until we arrive at low rates one giving positive NPV and another giving
negative NPV.
Step 8
Actual IRR can be calculated by using the following formula:
IRR=
LR + P.V of cash inflows at LR-P.V cash outflows (HR-
LR)P.V of cash inflows at LR-P.V of cash inflows at HR
Where:
R = interest rate,
LR = lower rate
HR = Higher rate
44
ACCEPT OR REJECTION CRITERION:
ACCEPT: If the IRR is greater than the cost of capital.
REJECT: If the IRR is less than the cost of capital.
MERITS:
1) It recognizes the time value of money.
2) It considers all cash flows occurring over the entire life of the projects to
calculate its return.
3) It is consistent with the shareholders wealth maximization objective.
DEMERITS:
1) It gives misleading and inconsistent results when the NPV of a project
does not decline with discount rates.
2) It also fails to indicate a correct choice between mutually exclusive projects
under certain situations.
45
3. PROFITABILITY INDEX METHOD (PI):
It is ratio of the present value of the cash inflows at the required rate of return to the
initial cash outflow of the investment. Using the profitability index PI or benefits cost ratio
(BCR) a project will qualify often acceptance if its PI exceeds one. The NPV will be
positive greater than one and will negative when the PI is less than one. Thus, NPV& PI approaches give the same results regarding the investment proposal. The selection of project
with the PI method can also be done on the basis of ranging. PI depends upon cash inflows
before depreciation and after tax. It makes into consideration the scrap value. The formula to
calculate PI or BCR is as follows:
PI=TOTAL PRESENT VALUE OF CASH INFLOWS
TOTAL PRESENT VALUE OF CASH OUTFLOWS
MERITS:
1) It gives due consideration to the time value of money.
2) Since the present value of cash inflows is divided by initial cash outflows it is a
relative measure of the projects profitability.
DEMERITS:
1) It is difficult to understand
2) It involves more computation than traditional methods.
46
TRADITIONAL OR NON-DISCOUNTED TECHNIQUES:
1. PAY BACK PERIOD METHOD (PBP):
Pay back measures the number of years required by the cash flows after tax to pay back
the original outlay required in an investment proposal. It depends upon cash inflows before
depreciation and after tax. Payback period does not consider the scrap value. There are two
ways of calculating the PBP.
The first method can be applied when the cash inflows are uniform.
PBP=
ORIGINAL INVESTMENT
CONSTANT ANNUAL CASH
INFLOWS
The annual cash flow represents the earnings i.e. estimated cash savings resulting from the
proposed investment.
If the calculated PBP is less than the standard, project is accepted and vice versa
The second method is used when projects cash flows are not equal and vary from year to
year. Payback period is calculated.
47
2. DISCOUNTED PAY BACK METHOD:
This is developed due to the limitation of the PBP method that it ignores time value of
money. Hence, an improvement is made where the present values of all inflows are cumulated
in order of time. The time at which the cumulated present value of cash inflows equals the
present value of cash outflows is known as discounted PBP. The project, which gives a shorter
discounted payback period, is accepted.
REASONS FOR POPUIARITY OF PBP:
Despite its serious short comings the PBP is widely used in appraising investments.
The PBP May be regarded roughly as the reciprocal for the IRR when the annual
cash inflow is constant and the life of the project fairly long.
The PBP is somewhat akin to the breakeven point. A rule of thumb, it serves as a
useful shortcut in the process of informational of generation and evaluation
The PBP conveys information about the rate at which the uncertainty associated
with a project is resolved. The shorter the PBP the faster the uncertainty associated
with the project is resolved and vice versa.
48
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 in case o evaluation of single project.
2) It is to calculate and simple to understand.
3) It is bases on the cash flow analysis.
DEMERITS:
1) It completely ignores all cash flows after the payback period.
2) It completely ignores time value of money.
In case the cash flow is unequal the payback period can be found by adding up the cash flows
until the total is equal to the initial cash outlay of the project.
49
3. ACCOUNTING RATE OF RETURN (ARR):
Average rate or return is also known as accounting rate or return method. It is based on
accounting information rather than cash flows. ARR is a technique that helps us in knowing the
particular project, from which decision can be made to accept or reject the investment proposal.
According to ARR as an accept / reject criterion, the actual ARR would compared with
the predetermined or a minimum required rate of return or cut off rate. A project can be
accepted if the actual ARR is higher than the minimum desired ARR, otherwise it is liable to
reject.
ARR depends upon profit after depreciation and tax (PAT), ARR neglects the scrap
value. The time value of money is not taken into consideration.
ARR
AVERAGE ANNUAL PROFIT AFTER
TAX * 100
AVERAGE INVESTMENTS
Average Investment = Net Additional working capital + Salvage value + 1/2(Original
Investment-Salvage value)
Average Annual Profit After
Tax=
TOTAL CASH FLOW AFTER TAX
LIFE OF THE PROJECT
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.
50
CHAPTER – IV
CAPITAL BUDGETING IN BHEL
51
INTRODUCTION OF CAPITAL BUDGETING IN B.H.E.L
The Capital Budgeting in BHEL is based on capital budget manual, which covers the
following aspects.
1) CAPITAL FUNDS BUDGET:
Five year plan
Annual plan exercise
Non plan budget exercise
2) FEASIBILITY REPORT/DETAILED PROJECT REPORT:
Submission and approval procedure/financial limits
Guidelines for preparation of feasibility reports
Extremely funded schemes
3) PROGRESS REPORTING AND MONITORING
4) REPLACEMENT GUIDELINES
5) GOVERNMENT GUIDELINES
52
CAPITAL FUNDS BUDGET
Capital funds budget is what enables a programmed of action on all capital expenditure
items to be grouped in one consolidated document. This outlines the proposal for creation of
new assets additions for increase in production; diversification or reduction of cost ensures how
these ventures will be financed over a given period. Included five years plan, annual plan
exercise and non-plan budget exercise, which are described below.
A business proposal regardless of whether it is a new investment or acquisition of
another company or restructuring initiative-raises the value of the firm only if the present value
of the future stream of net cash benefits expected from the proposal is greater than the initial
cash outlay required to implement the proposal.
53
LONG TERM SOURCES OF FINANCE
It is natural phenomenon that the firm is always in deficit of funds. There are two
methods of rising of funds.
1) LONG TERM SOURCES.
2) SHORT TERM SOURCES.
Capital budgeting decisions involve long-term funds. The different long-term sources of
finance generally followed by companies are.
EQUITY CAPITAL:-
Equity capital represents ownership capital, as equity shareholders collectively own the
company. They enjoy the rewards and bear the risk of ownership. However, their liability of the
owner in a proprietary firm and the partners in a partnership concern is limited to their capital
contributions.
INTERNAL ACCRUALS:-
The internal accruals of a firm consist of depreciation charges and retained earnings.
Depreciation represents the allocation of capital expenditure to various periods over which the
capital expenditure is expected to benefit the firm. Retained earnings are that portion of equity
earnings, which are ploughed back to the firm. Because retained earnings are the sacrifice made
by the equity shareholders, they are referred to as internal equity.
PREFERENCE CAPITAL:-
It represents a hybrid form of financing as it has many features of both ordinary shares
and debenture. Preference share may be issued with or without maturity date. The holder of
preference shares get divided at a fixed rate and have preference over ordinary shareholders.
54
DEBENTURES:-
For large publicity traded firms, debentures are viable alternative to term loans. Akin to
promissory notes, debentures are instruments for raising long-term debt. Debentures holders are
the creditors of the company. The obligation of the company towards its debenture holder is
similar to that of borrower who promises to pay interest and principal at specified times.
TERM LOANS:-
Term loans for more than a year maturity. It is generally available for a period of 10
years. Interest on term loans is tax deductible. They are obtained from banks and specially
created financial institutions like IFCI, ICICI and IDBI etc the purpose of term lands is mostly
to finance the company’s capital expenditure. They are generally obtained of financing large
expansion, modernization or diversification projects. Hence this method of financing is also
called project financing. This is the most widely used source of financing.
55
CHAPTER –V
DATA ANALASIS
AND
INTERPRETATION
56
PROBLEM
PROJECTS EVALUTED
PROJECTS Project1 Project2 Project3 Project4 Project5
Cost of Investment(Lakhs)
5125 10250 4125 8125 1920
PBDTYear
1
Year
2
Year
3
Year
4
Year
5
Year
6
Year
7
Year
8
Year
9
Year
10TOTAL
PROJECT1
1020 1520 1520 1620 1720 1520 1650 1520 1210 1310 14610
PROJECT2
3060 4560 4560 4860 5160 4560 4950 4560 3630 3930 43830
PROJECT3
306 456 456 486 516 456 495 456 363 393 4380
PROJECT4
1122 1672 1672 1782 1892 1672 1815 1672 1331 1441 16070
PROJECT5
91.8 136.8 136.8 145.8 154.8 136.8 148.5 136.8 108.9 117.9 13140
Depreciation as per the profit and loss account 15% SLM
Depreciation as per income tax Act 1st year 35%, 2nd year onward 15% -
(Dep-method)
Tax rate 33%
57
Present value factor 13%
SOLUTION
PROJECT 1
(Estimated budget Rs 5125lacks)
YEARS PBDT
LESS DEP AS PER
INCOME TAX
PBT(-)TAX
33%PAT
ADD: DEP
CFAT CCFAT
1 1020 1794 -774 -255 -519 1794 1276 1276
2 1520 500 1020 337 683 500 1183 2459
3 1520 425 1095 361 734 425 1159 3618
4 1620 361 1259 415 844 361 1205 4823
5 1720 307 1413 466 947 307 1254 6077
6 1520 261 1259 415 844 261 1105 7182
7 1650 222 1428 471 957 222 1179 8361
8 1520 188 1332 439 893 188 1081 9442
9 1210 160 1050 346 704 160 864 10306
10 1310 136 1174 387 787 136 923 11229
TOTAL 14610 4354 10256 3382 6874 4354 11229
58
YEARS CFAT CCFAT PV@13% PVCFAT PV@20% PVCFAT
1 1276 1276 0.885 1129.26 0.883 1126.70
2 1183 2459 0.783 926.28 0.694 821
3 1159 3618 0.693 803 0.579 671.06
4 1205 4823 0.613 738.66 0.482 580.81
5 1254 6077 0.543 680.92 0.401 502.85
6 1105 7182 0.480 530.4 0.335 370.17
7 1179 8361 0.425 501 0.279 328.94
8 1081 9442 0.376 406.45 0.332 358.89
9 864 10306 0.333 287.71 0.194 167.61
10 923 11229 0.295 272.28 0.161 148.60
TOTAL 11229 6276.25 5076.66
PAY BACK PERIOD:
= 4+ 5125-4823/1254
= 4.2 months
NET PRESENT VALUE:
NPV = Present value of cash inflows - cash outflows (Investment)
= 6276.25 – 5125
= 1151.25
59
INTERNAL RATE OF RETURN:
= 13+ 6276.25-5125/ (6276.25-5076.66)*(20-13)
= 13+ 1125.25/ (1199.59)*(7)
= 13+ 6.56
= 21. 56%
RETURN ON INVESTMENT:
Average cash flow = cash flows/10
= 11229/ 10
= 1122.9
Investment = Investment/2
= 5125/2
= 2562.5
= 44%
60
PROFITABLE INDEX:
Total present value of cash flow =6276.25
Total Investment =5125
= 1.22 Times
61
PROJECT 2
(Estimated budget Rs 10250lacks)
YEARS PBDT
LESS DEP AS PER
INCOME TAX
PBT(-)TAX
33%PAT
ADD:
DEPCFAT CCFAT
1 3060 3588 -528 -174.24 -353.76 3588 3234.24 3234.24
2 4560 999 3561 1175.13 2385.87 999 3384.87 6619.11
3 4560 850 3710 1224.3 2485.7 850 3335.7 9954.81
4 4860 722 4138 1365.54 2772.46 722 3494.46 13449.27
5 5160 613 4547 1500.51 3046.49 613 3659.49 17108.76
6 4560 521 4039 1332.87 2706.13 521 3227.13 20335.89
7 4950 444 4506 1486.98 3019.02 444 3463.02 23798.91
8 4560 377 4183 1380.39 2802.61 377 3179.61 26978.52
9 3630 320 3310 1092.3 2217.7 320 2537.7 29516.22
10 1310 272 3658 1207.14 2450.86 272 2722.86 32239.08
TOTAL 43830 8706 35124 8706 32239.08
62
YEARS CFAT CCFAT PV@13% PVCFAT PV@20% PVCFAT
1 3234.24 3234.24 0.885 2862.16 0.883 2695.20
2 3384.87 6619.11 0.783 2650.85 0.694 2350.60
3 3335.7 9954.81 0.693 2311.80 0.579 1930.38
4 3494.46 13449.27 0.613 2143.22 0.482 1685.21
5 3659.49 17108.76 0.543 1986.22 0.401 1470.66
6 3227.13 20335.89 0.480 1550.05 0.335 1080.76
7 3463.02 23798.91 0.425 1471.99 0.279 966.46
8 3179.61 26978.52 0.376 1196.04 0.332 739.47
9 2537.7 29516.22 0.333 844.76 0.194 491.82
10 2722.86 32239.08 0.295 802.12 0.161 439.75
TOTAL 32239.08 17819.23 13850.35
PAY BACK PERIOD:
= 3+ 10250-9954.81/3494.46
= 3.1 months
NET PRESENT VALUE:
NPV = Present value of cash inflows - cash outflows (Investment)
= 17819.23 – 10250
= 7569.23
63
INTERNAL RATE OF RETURN:
= 13+ 17819.23- 10250/ (17819.23-13850.35)*(20-13)
= 13+7569.23 / (3968.88)*(7)
= 13+ 13.35
= 26. 35%
RETURN ON INVESTMENT:
Average cash flow = cash flows/10
= 32239.08/ 10
= 3223.90
Investment = Investment/2
= 10250/2
= 5125
= 63%
PROFITABLE INDEX:
PI = 17819.23/1025
= 1.73 Times
64
PROJECT 3
(Estimated budget Rs 4125lacks)
YEARS PBDT
LESS DEP AS PER
INCOME TAX
PBT(-)TAX
33%PAT
ADD: DEP
CFAT CCFAT
1 306 1444 -1138 -375.54 -762.46 1444 681.54 681.54
2 456 402 54 17.82 36.18 402 438.18 1119.72
3 456 342 114 37.62 76.38 342 418.38 1538.1
4 486 291 195 64.35 130.65 291 421.65 1959.75
5 516 247 269 88.77 180.23 247 427.23 2386.98
6 456 210 246 81.18 164.82 210 374.82 2761.8
7 495 178 317 104.61 212.39 178 390.39 3152.19
8 456 152 304 100.32 203.68 152 355.68 3507.87
9 363 129 234 77.22 156.78 129 285.78 3793.65
10 393 109 284 93.72 190.28 109 299.28 4092.93
TOTAL 4383 3504 879 3504 4092.93
YEARS CFAT CCFAT PV@13% PVCFAT PV@20% PVCFAT
65
1 681.54 681.54 0.885 603.13 0.883 567.95
2 438.18 1119.72 0.783 343.16 0.694 304.29
3 418.38 1538.1 0.693 289.96 0.579 242.12
4 421.65 1959.75 0.613 258.60 0.482 203.34
5 427.23 2386.98 0.543 231.88 0.401 171.69
6 374.82 2761.8 0.480 180.03 0.335 125.53
7 390.39 3152.19 0.425 165.94 0.279 108.95
8 355.68 3507.87 0.376 133.79 0.332 82.72
9 285.78 3793.65 0.333 95.13 0.194 55.38
10 299.28 4092.93 0.295 88.16 0.161 48.33
TOTAL 4092.93 2389.80 1910.31
NET PRESENT VALUE:
NPV = Present value of cash inflows - cash outflows (Investment)
= 2389.80 – 4125
= -1735.2
INTERNAL RATE OF RETURN:
= 13+ 2389.80- 4125/ (2389.80-1910.31)*(20-13)
= 13+ (-1735.2) / (479.49)*(7)
= 13+ (-25. 3)
= 12.5%
66
RETURN ON INVESTMENT:
Average cash flow = cash flows/10
= 4092.93/ 10
= 409.29
Investment = Investment/2
= 4125/2
= 2062.5
= 20%
PROFITABLE INDEX:
PI = 2389.80/4125
= 0.58 Times
67
PROJECT 4
(Estimated budget Rs 8125lacks)
YEARS PBDT
LESS DEP AS PER
INCOME TAX
PBT(-)TAX
33%PAT
ADD: DEP
CFAT CCFAT
1 1122 2844 -1722 -568.26 -1153.74 2844 1690.26 1690.26
2 1672 792 880 290.40 589.60 792 1381.60 3071.89
3 1672 673 999 329.67 669.33 673 1342.33 4414.22
4 1782 572 1210 399.30 810.70 572 1382.70 5796.92
5 1892 487 1405 463.65 941.35 487 1428.35 7225.27
6 1672 341 1331 439.23 891.77 341 1232.77 8458.04
7 1815 289 1526 503.58 1022.42 289 1311.42 9769.46
8 1672 246 1426 470.58 955.42 246 1201.42 10970.88
9 1331 209 1122 370.26 751.74 209 960.74 11931.62
10 1441 178 1263 416.79 846.21 178 1024.21 12955.80
TOTAL 16071 6631 9440 6631 12955.80
68
YEARS CFAT CCFAT PV@13% PVCFAT PV@20% PVCFAT
1 1690.26 1690.26 0.885 1495.80 0.883 1408.55
2 1381.60 3071.89 0.783 1081.99 0.694 959.44
3 1342.33 4414.22 0.693 930.30 0.579 776.81
4 1382.70 5796.92 0.613 848.03 0.482 666.81
5 1428.35 7225.27 0.543 775.26 0.401 574.02
6 1232.77 8458.04 0.480 592.12 0.335 412.85
7 1311.42 9769.46 0.425 557.43 0.279 365.99
8 1201.42 10970.88 0.376 451.93 0.332 279.41
9 960.74 11931.62 0.333 319.81 0.194 186.19
10 1024.21 12955.80 0.295 301.72 0.161 165.42
TOTAL 12955.80 7354.41 5795.51
PAY BACK PERIOD:
= 5+ 8125-7225.27/1232.77
= 5.7 months
NET PRESENT VALUE:
NPV = Present value of cash inflows - cash outflows (Investment)
= 7354.40 – 8125
= -770.60
69
INTERNAL RATE OF RETURN:
= 13+ 7354.40 – 8125/ (7354.40 – 5795.51)*(20-13)
= 13+ (-770.60) / (1558.89)*(7)
= 13+ (-3.46)
= 9.54%
RETURN ON INVESTMENT:
Average cash flow = cash flows/10
= 12955.8/ 10
= 1295.58
Investment = Investment/2
= 8125/2
= 4062.5
= 32%
PROFITABLE INDEX:
PI = 7354.40/8125
= 0.9 Times
70
PROJECT 5
(Estimated budget Rs 1920lacks)
YEARS PBDT
LESS DEP AS PER
INCOME TAX
PBT(-)TAX
33%PAT
ADD: DEP
CFAT CCFAT
1 91.8 672 -580.2 -191.46 -388.73 672 283.26 283.26
2 136.8 187 -50.2 -16.56 -33.63 187 153.36 436.62
3 136.8 159 -22.2 -7.33 -14.87 159 144.13 580.75
4 145.8 135 10.8 3.56 7.23 135 142.24 722.99
5 154.8 115 39.8 13.13 26.66 115 141.67 864.66
6 136.8 98 38.8 12.80 25.99 98 123.99 988.65
7 148.5 83 65.5 21.61 43.88 83 126.88 1115.53
8 136.8 71 65.8 21.71 44.08 71 115.08 1230.61
9 108.9 60 48.9 16.13 32.76 60 92.76 1323.37
10 117.9 51 66.9 22.07 44.82 51 95.82 1419.21
TOTAL 1314.9 1631 -316.1 1631 1419.21
71
YEARS CFAT CCFAT PV@13% PVCFAT PV@20% PVCFAT
1 283.26 283.26 0.885 250.67 0.883 236.05
2 153.36 436.62 0.783 120.11 0.694 106.50
3 144.13 580.75 0.693 99.88 0.579 83.41
4 142.24 722.99 0.613 87.24 0.482 68.59
5 141.67 864.66 0.543 76.89 0.401 56.93
6 123.99 988.65 0.480 59.55 0.335 41.53
7 126.88 1115.53 0.425 53.93 0.279 35.41
8 115.08 1230.61 0.376 43.29 0.332 26.76
9 92.76 1323.37 0.333 30.87 0.194 17.97
10 95.82 1419.21 0.295 28.22 0.161 15.47
TOTAL 1419.21 850.68 688.64
NET PRESENT VALUE:
NPV = Present value of cash inflows - cash outflows (Investment)
= 850.68 – 1920
= -1069.32
INTERNAL RATE OF RETURN:
= 13+ 850.68 – 1920/ (850.68-688.45)*(20-13)
= 13+ (-1069.32) / (162.04)*(7)
= 13+ - (46)
= 33%
RETURN ON INVESTMENT:
72
Average cash flow = cash flows/10
= 1419.21/ 10
= 141.92
Investment = Investment/2
= 1920/2
= 960
= 15%
PROFITABLE INDEX:
PI = 850.68/1920
= 0.44 Times
73
CFBDAT: CASH FLOW BEFORE DEPRECIATION AND TAX
DEP: DEPRECIATION
CFBT: CASH FLOWS BEFORE TAX
CFAT: CASH FLOW AFTER TAX
PBP: PAY BACK PERIOD
PV: PRESENT VALUE
NPV: NET PRESENT VALUE
PVCF: PRESENT VALUE OF CASH FLOW
ARR: AVERAGE RATE OF RETURN
ROI: RETURN ON INVESTMENT
74
CHAPTER – VI
FINDINGS AND SUGGESSIONS
75
FINDINGS
The study concerned with the capital budgeting with reference to BHEL. The data
is collected, organized, analyzed and interpreted. BHEL has a good organization culture,
excellent working environment and a very precious asset that is highly dedicate, hard-working,
well qualified efficient and knowledgeable workforce
The following findings are obtained from the analysis of data
1. The first project i.e. is generating unequal cash flows for 10 years. The initial
investment is Rs 5125lacks.
The discounted PBP is 4.2years. The investment will recover in 4 years and 2 months
NPV and IRR are positive for the proposal. Then the required rate of return i.e. 21.56%
The profitable index is 1.22 times > 1
Return on investment is 44%
2 .The second project i.e. is the unequal cash flows for 10 years. The initial investment is Rs
10250lacks.
The discounted PBP is 3.1years.The investment will recover in 3 years and 1 month
NPV and IRR are positive for the proposal. Then the required rate of return i.e. 26.35%
The profitable index 1.73times
Return on investment is 63%
76
3. The third project i.e. generates is the unequal cash flows for 10 years. The initial investment is Rs 4125lacks.
NPV and IRR are negative for the proposal.
The profitable index is 0.58 is not good
Return on investment is 20%
4. The fourth project i.e. generates is the cash flows for 10 years. The initial investment is Rs 8125lacks.
The discounted PBP is 5.7years.The investment will recover in 5 years and 7 months
NPV is negative IRR is 9.54%
Profitable index is 0.9 which is not good sign
Return on investment is 32%
5. The fifth project i.e. generates is the unequal cash flows for 10 years. The initial investment is Rs 1920lacks.
NPV and IRR are negative for the proposal.
The profitable index is 0.44 it is very least
Return on investment is 15%
77
SUGGESTIONS
1. The first project in all contexts PBP, NVP, IRR, & PI are positive as its returns are positive,
accept the project.
2. The second project PBP of 3.1 years, NPV, IRR, PI are indicating of positive signs therefore
the project is accepted.
3. The third project NPV and IRR are negative for the proposal. The profitable index is 0.58 is
not good it indicating negative values so the project is rejected.
4. The fourth project PBP is 5.7years. NPV is negative IRR is 9.54%
Profitable index is 0.9 which is not good sign so that the project if may increase the NPV may
get profits and accept the project.
5. The fifth project in the project all the values is negative and PI is also 0.44 it is very least so
reject the project.
78
FINANCIAL STATEMENTS
79
OPERATING RESULTS (RS/LKS)
SL
NO
DESCRIPTION ACTUALS
2004-05 2005-06 2006-07 2007-08 2008-09
A TURNOVER-BHEL -NON BHEL
3046
171622
27697
239520
61181
228310
667
309568
779
414037
TOTAL TURNOVER 174668 267217 289491 310235 414816
CHANGES IN WIP
CHANGES IN FG
EXPORT INCENTIVES
2400
7295
4238
3165
2338
3397
3975
-8827
1779
17781
4591
2283
10637
4938
1112
GROSS TURNOVER 188601 276117 286418 334890 431503
EXCISE DUTY 19597 23131 22027 27236 24537
B GTO LESS ED 169004 252986 264391 307654 406966
DIRECT MATERIALS
SUB CONTRACT PAYMENT
POWER AND FUEL
TRANSFER IN SERVICE
98043
391
1513
363
146246
459
1758
1163
151552
334
491
1743
183845
790
1840
1394
259592
978
1925
1347
C TOTAL OF ‘C’ 100310 149626 154120 187869 263842
D VALUE ADDED 68694 103360 110271 119785 143124
E PERSONNEL PAYMENTS
INDIRECT MATERIALS
OTHER EXPENSES-BHEL
OTHER EXPENSESNONBHEL
23138
2866
3274
7938
2053
26390
3171
3894
8783
5595
30754
4007
4670
13752
-626
36001
4039
6125
12848
1805
58365
4560
6436
15402
142
80
PROVISIONS
PROV.EXCH.VAR.
LESS.MISC.INCOM
114
6565
-34
7500
288
8351
-1524
11746
-324
13913
TOTAL OF ‘E’ 32818 40299 44494 47548 70668
F GROSS MARGIN (PBIDT) 35876 63061 65777 72237 72456
DEPRECIATION
DRE ON VRS
2153
601
2194 2487 3321 3978
G GROSS PROFIT (PBIT) 33122 60867 63290 68916 68478
INTEREST 1105 -682 -2300 -5870 -6826
H PROFIT BEFOUR TAX 32017 61549 65590 74786 75304
OPERATING COST 136639 201962 221227 234377 338382
81
BALANCE SHEET (RS/LKS)
DESCRIPTION ACTUALS
2004-05 2005-06 2006-07 2007-08 2008-09
RESOURCES:
FUNDS FROM CORP.OFFICE
RESERVES & SURPULS
INTER UNIT BALANCE(NET)
DEFERRED CREDIT
LOANS
3252
133675
(49905)
513
3252
181157
(77122)
1054
3252
212474
(129311)
607
6504
241734
(131467)
587
6504
271259
(173296)
2566
TOTAL 87535 108341 87022 117358 107033
UTILISATION OF FUNDS
FIXED ASSETS
GROSS BLOCK
OP BAL.
ADDITIONS
DELETIONS
CL BALANCE
LESS CUM EDPRECIATION
38519
3936
42455
33559
42455
3845
46300
35700
46115
4153
50268
38021
46300
4823
51123
41214
51123
11991
63114
45415
NET BLOCK 8896 10600 12247 9909 17699
CAPTIAL IN WIP
INTANGIBLE ASSETS
2509
77
5879
63
7563
19
5404
1667
10139
1930
82
TOTAL (A) 11482 16542 19829 16980 29768
WORKING CAPITAL
CURRENT ASSETS
INVENTORIES
BOOK DEBTS
CASH /BANK BALANCES
LOANS & ADVANCES
INTER UNIT BALANCES(NET)
63734
112238
2094
14631
75016
135322
4643
20081
81476
177301
12
17273
111466
215291
14
24379
141190
287414
15
24978
SUB TOTAL (B) 192697 235062 276062 351150 453597
CURRENT LIABILITIES
ADVANCES FROMCUSTOMER
SUNDRY CREDITORS
OYHER LIABILITIES
PROVISIONS
70840
24225
4091
17488
76754
39495
3800
23151
104813
46452
3093
54511
131961
54586
3034
65151
225986
58078
2910
89358
SUB TOTAL (C) 116644 143200 208869 254740 376332
NET WORKING CAPITAL(B)-(C)
76053 91862 67193 96410 77265
DEFERRED REV.EXPENDITUR
TOTAL 87535 108404 87022 113390 107033
CAPITAL EMPLOYED(EXCL IU)
85026 102525 79459 107986 96894
83
YEAR END INVENTORY (RS/LKS)
DESCRIPTION ACTUALS
2004-05 2005-06 2006-07 2007-08 2008-09
MATERIAL INVENTORY
RAW MATL & COMP
INDIRECT MATERIALS
MATERIAL IN TRANSIT
TRANSFER IN TRANSIT
MATLS WITH FABRICATORS
SCRAP & OTHERS
16727
1187
4719
1806
3045
108
19656
1286
5038
2107
4963
278
21772
1546
9198
3379
7968
300
25459
1987
14325
4163
5851
490
31900
2400
18100
6400
7100
400
TOTAL OF MATERIAL INVENTORY
27592 33328 44163 52275 66300
PRODUCTION INVENTORY
WORK IN PROGRESS
FINISHED GOODS
25983
10679
29148
13017
33123
4190
50904
8781
61500
13700
TOTAL OF PRODUCTION INVENTORY
36662 42165 37313 59685 75200
TOTAL INVENTORY 64254 75493 81476 111960 141500
TURNOVER 174668 267217 289491 310235 414816
NO OF DAYS OF TURNOVER
134 103 103 132 125
84
STATEMENTS
Latest Quarterly/Half yearly Detailed Quarterly
As On(Months) 31-Mar-2010(3) 31-Mar-2009(3) % Change
Sales of Products/Services 135591.00 105400.70 28.64
Other Income 2079.80 1971.90 5.47
Total Income 137670.80 107372.60 28.22
Total Expenses 110718.40 88437.90 25.19
OPBDIT 26952.40 18934.70 42.34
Interest 178.00 80.90 120.02
Depreciation 1646.90 1008.30 63.33
Exceptional & Extraordinary Items
0.00 0.00 --
Prior Period Adjustments 0.00 0.00 --
Provision for Tax 9887.20 7470.60 32.35
After Tax Profit 19095.80 13474.70 41.72
Equity Capital 4895.20 4895.20 0.00
Reserves 0.00 0.00 --
85
Income Statement
31-Mar-09(12) 31-Mar-08(12) 31-Mar-07(12)
Profit / Loss A/C Rs mn %OI Rs mn %OI Rs mn %OI
Net Sales (OI) 262123.30 100.00 193046.40 100.00 175147.60 100.00
Material Cost 155874.30 59.47 104006.90 53.88 85614.10 48.88
Increase Decrease Inventories -11515.40 -4.39 -8272.60 -4.29 -1811.90 -1.03
Personnel Expenses 29836.80 11.38 26076.90 13.51 23689.50 13.53
Manufacturing Expenses 24190.80 9.23 18204.70 9.43 21950.70 12.53
Gross Profit 63736.80 24.32 53030.50 27.47 45705.20 26.10
Administration Selling and Distribution Expenses
26691.00 10.18 19838.70 10.28 10649.90 6.08
EBITDA 37045.80 14.13 33191.80 17.19 35055.30 20.01
Depreciation Depletion and Amortisation 3342.70 1.28 2972.10 1.54 2729.70 1.56
EBIT 33703.10 12.86 30219.70 15.65 32325.60 18.46
Interest Expense 307.10 0.12 354.20 0.18 433.30 0.25
Other Income 14985.30 5.72 14457.80 7.49 5463.30 3.12
Pretax Income 48381.30 18.46 44323.30 22.96 37355.60 21.33
Provision for Tax 17106.40 6.53 15710.50 8.14 13213.70 7.54
Extra Ordinary and Prior Period Items Net 118.90 0.05 -9.20 -0.00 5.10 0.00
86
Net Profit 31393.80 11.98 28603.60 14.82 24147.00 13.79
Adjusted Net Profit 31393.80 11.98 28603.60 14.82 24147.00 13.79
Dividend - Preference 0.00 0.00 0.00 0.00 0.00 0.00
Dividend - Equity 8321.80 3.17 7465.20 3.87 5996.60 3.42
87
BIBLIOGRAPHY
88
BIBLIOGRAPHY
BOOK/RESOURCE AUTHOR
FINANCIAL MANAGEMENT I.M.PANDEY
FINANCIAL MANAGEMENT KHAN & JAIN
FINANCIAL MANAGEMENT GUPTA & SHARMA
FINANCIAL MANAGEMENT PRASANNA CHANDRA
WEBSITES
www.bhelhyderabad.com
www.bhel.com
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