prinkal final one
TRANSCRIPT
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Chapter 1.
INTRODUCTION
CONTENTS:
Introduction on capital Budgeting.
Nature Investment Decisions.
Objectives of Investment Decision
Process of investment decision.
Factors Affecting Capital Investment Decision.
Introduction:
INTRODUCTION OF CAPITAL BUDGETING:
The investment decision of a firm is known as capital budgeting or
capital expenditure decision .A capital budgeting decision may be
defined as the firms decision to invest its current funds in long
term assets to get the benefit over the years .Capital budgeting
means planning for capital assets. If is to be decided whether
money should be invested in long term projects like setting up a
new factory or installing machinery etc. there may be various
proposals regarding capital expenditure. We are required to choose
the best out of various alternatives.
In any business, investment of funds in land, building, equipment
or stock must be made carefully. Once the decision to acquire a
fixed asset is taken, It is very difficult to reverse that decision.
Expenditure on plant & machinery & other long term assets
influence the future earning capacity of the firms. An efficient
allocation of capital is the most important finance function in the
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modern times. It involves decisions to commit the firms funds to
the long - term assets. Capital budgeting for investment decisions is
of considerable importance to the firm since they tend to determine
its value by influencing its growth, evaluation of capital budgeting
decisions.
NATURE OF INVESTMENT DECISIONS:-
The investment decisions of a firm are generally known as the
capital budgeting, or capital expenditure decisions. A capital
budgeting decision may be defined as the firms decision to invest
its current funds most effectively in the long- term assets in
anticipation of an expended flow of benefits over a series of years.
The long-term assets are those that affect the firms operational
beyond the one year period.
Investment decisions generally include expansion, acquisition
modernization and replacement of the long-term assets. Sale of a
division or business (Divestment) is also an investment decision.Decision like the change in the methods of sales distribution, or an
advertisement campaign or a research and development program
have long-term implications for the firms expenditures and
benefit, and therefore, they should also be evaluated as investment
decisions.
The following are the features of investment decisions.
The exchange of current funds for future benefits.
The funds are invested in long-term assets.
The feature benefits will occur to the firm over a series of
years.
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OBJECTIVES OF INVESTMENT DECISIONS:-
Understand the nature and importance of investment
decisions.
Explain the methods of calculating Net present value (NPV)
and Internal rate of return
(IRR)
Show the implicated of Net present value (NPV) and Internal
rate Of return (IRR)
Describe the Non- DCF evaluation Criteria. Payback period
and Accounting rate of return (ARR).
Institute the competition of the discounted payback.
The following are some of the cases, where heavy capital
investment may be necessary:
(i) Replacements: Replacement of fixed assets may become
necessary either on account of their being worn out or becoming
outdated on account of new technology.
(ii)Expansion: A firms may have to expand its production capacity
on account of high demand for its products & inadequate
production capacity. This will need additional capital investment.
(iii) Diversification: A business may like to reduce its risk by
operating in several markets rather than in a single market. In such
an event, capital investment may become necessary for purchase of
machinery & facilities to handle the new products.
(iv) Research &Development: Large sums of money may have to
expanded for research & development in case of those industry
where technology is rapidly changing. In case large sum of money
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is needed for equipment, these proposals will normally be included
in the capital budget.
PROCESS OF INVESTMENT DECISIONS:-
Capital Budgeting is a complex process which may be divided into
the following phases.
Capital Budgeting Process:-
1. Identification of investment proposal.
2. Screening the proposal.
3. Evaluation of various proposals.
4. Fixing priorities.
5. Fesiblity study to identify the viability of the project.
6. Final approval & preparation of capital expenditure budget.
7. Implementing proposal.
8. Performance review.
I. It throws light on how realistic were the assumptions underlying
the project.
II. It provided a documented log of experience that is highlyvaluable for decision making.
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FACTORS AFFCETING CAPITAL INVESMENT DECISIONS
(i) The amount of investment: Computation of capital investment
required
(a) Cost of the new projects.
(b) Installation cost.
(c) Working capital.
(d) Proceeds from sale of assets.
(e) Tax effects.
(ii) Minimum rate of return on investment: The management
expects a minimum rate of return on the capital investment. The
minimum rate of return is usually decided on the basis of the cost
of capital. (Cut-off point: The cut-off point refers to the point
below which a project would not be accepted).
For example: If 10% is the desired rate of return, the cut-off rate is
10%. The cut-off point may also be in terms of period.
(iii) Returns expected from the investment: Capital investment
decision are made in anticipation of increased returns in the future.
It is therefore very necessary to estimate the future return or
benefits accruing from the investment proposals.
(iv) Ranking of investment proposals:
(a) Where capital is rationalized i.e., that is a limit on funds
available for investment.
(b) Where two or more investment opportunities are mutually
exclusive, i.e. only one of the opportunities can be undertaken.
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(v) Risk & uncertainty: Different capital investment proposal have
different degree of risk & uncertainty. There is a slight difference
between risk & uncertainty. Risk involves Situation in which theprobabilities are not known. Of course in most cases these two
terms are used interchangeably .risk in capital investment decision
may be due to general economic condition, Competition,
technological development, Consumer preferences, labour
condition, etc.
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Chapter 2.
COMPANY PROFILE:
A Miniratna PSU was originally set up in the year 1896 as Central
Province Prospecting Syndicate which was later renamed asCentral Provinces Manganese Ore Company Limited (CPMO), a
British Company incorporated in the UK. In 1962, as a result of an
agreement between the Government of India and CPMO, the assets
of the latter were taken over by the Government and MOIL was
formed with 51% capital held between the Govt. of India and the
State Governments of Maharashtra and Madhya Pradesh and the
balance 49% by CPMO. It was in 1977, the balance 49%
shareholding was acquired from CPMO and MOIL became a 100%Government Company under the administrative control of the
Ministry of Steel.
At present, MOIL operates 10 mines, six located in the
Nagpur and Bhandara districts of Maharashtra and four in the
Balaghat district of Madhya Pradesh. All these mines are about a
century old. Except 3, rest of the mines are worked through
underground method. The Balaghat Mine is the largest mine of the
Company. The mine has now reached a mining depth of 309 meters
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from the surface. Dongri Buzurg Mine located in the Bhandara
district of Maharashtra is an opencast mine that produces
manganese dioxide ore used by dry battery industry. This ore in the
form of manganese oxide is used as micro-nutrient for cattle feed
and fertilizers. MOIL fulfills about 50% of the total requirement of
dioxide ore in India. At present, the annual production is around
1,093,363 tones which is expected to grow in the coming years.
MOIL has set up Ferro Manganese Plant (10,000 TPY) and
Electrolytic Manganese Dioxide (EMD) Plant (1000 TPY) as per
its diversification plan for value addition to manganese ore. MOIL
has also set up a Captive Power Plant and is further considering,
expanding the capacity of ferro manganese plant and setting up a
new Silico Manganese Plant by means of joint ventures entered
into with Rashtriya Ispat Nigam Limited and Steel Authority of
India Limited.
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Diversification Projects of MOIL:
MOIL not only deals in manufacture of manganese ore. It has
started adding value added products to its portfolio and also
diversified to increase its shareholders value and to become a
multi-product company.
1. Electrolytic Manganese Dioxide (EMD) Plant:
MOIL set up its EMD plant with capacity of 800 TPA at
DongriBuzurg mine. This plant is second of its kind in India and
based on original technology. EMD is used in the manufacture of
dry batteries. Its installed capacity has expanded to 1000 TPA and
it is also planning to further increase its capacity to 2000 TPA by
considering its international standard of quality and domestic and
global demand.
2. Ferro Manganese Plant:
MOIL Ltd had produced about 8694 TPA of Ferro Manganese as
compared to previous years 9081 tonnes. The closing stock of the
Ferro Manganese was 2078 tone as on date 31.03.2012, or
14204toones of Silico Manganese or any combination of these twoproducts depending upon the market scenario.
3. Wind Energy Farm:
As a part of diversification move, MOIL has set up a wind energy
farm of 4.8MW capacities at Nagda Hills and 15.2 MW at RatediHills Dist. Dewas, Madhya Pradesh which generates 332.14 Lakh
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units during the year. In consonance with this ideology of Energy
saved is energy produced. The plan is to utilize the electricity
generated by this plant to save the electricity cost in the mines
plants situated in Balaghat district.
4. Electrolytic Manganese Dioxide (EMD):
MOIL has manufacture 714 tonnes of EMD in current financial
year 2011-12 as compared to previous year of 805 tonnes. The net
sale of EMD was 1005 tonnes as against the previous year was 911
tonnes. Excellent Award for EMD Plant DongriBuzurg Mine at
National Convention on Quality Concepts-2011.
Mines &Wind Farms:
MOIL owns 10 mines: six of them are located in the Nagpur and
Bhandara districts of Maharashtra and four in Balaghat district of
Madhya Pradesh. All these mines are 100 years old and seven of
them are operated through underground method. MOIL fulfil about
70% of the total dioxide ore requirement in India. The total
production of manganese ore from all the mines constitutes about
65% requirement of the country. MOIL annually produces around
0.9 million tons of manganese ore.
In order to promote non-conventional energy resources, MOIL has
installed 4.8 MW Wind Energy Farm at NagdaHills and 15.2 MW
Wind Farm at Ratedi Hills, Dist. Dewas in Madhya Pradesh which
has generated 310.3 lakh units during the year.
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Sr.no. Mines Names &ADDRESS
MAHARASHTRA1. ChiklaMine,Chikla Mine,
P.O. - Chikla, Tah.-Tumsar, Dist- Bhandara, Maharashtra, Pin-441
920
2. DongriBuzurg Mine,
P.O. - DongriBuzurg, Tah.-Tumsar, Dist- Bhandara, Maharashtra,
Pin-441 907
3. Beldongri Mine,
P.O. - Satuk, Tah- Ramtek, Dist-Nagpur, Maharashtra, Pin-441 105
4. Kandri Mine,
P.O. - Kandri, Tah- Ramtek, Dist-Nagpur, Maharashtra, Pin-441 401
5. Munsar Mine,
P.O. - Munasar, Tah- Ramtek, Dist-Nagpur, Maharashtra, Pin-441
106
6. Gumgaon Mine,
P.O. - Khapa, Tah-Saoner, Dist-Nagpur, Maharashtra, Pin-441 401
MADHYA PRADESH
7. Balaghat Mine,
P.O. - Bharweli, Dist - Balaghat, M.P., Pin-481 102
8. Ukwa Mine,
P.O. - Ukwa, Dist - Balaghat, M.P., Pin-481 105
9. Tirodi Mine,
P.O. - Tirodi, Dist - Balaghat, M.P., Pin-481 449
10. Sitapatore Mine
P.O. - Sukli, Dist - Balaghat, M.P., Pin-481 449
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LIST OF WIND FARMS
MADHYA PRADESH1. Nagda Hills,
Dist. Dewas, M.P
2. Ratedi Hills,
Dist. Dewas, M.P
Source: Annual report of MOIL 2010-11
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The companys mission is to become one of the best manganese
ore producers of the world with the bursting utilization and the up
gradation of the skills, knowledge, talents and the technology.
The company vision is to extent their business into the global
market by keeping the motives in the view of value addition
through joint ventures/ technology transfer.
Objectives of the Organization:
To maintain the status of market leader in manganese industry
in India.
To generate adequate surpluses and insure the best return to
the satisfaction of all stakeholders.
To maintain the quality of manganese ore and related products
at all stage and enhance total customer satisfaction through
promote delivery of quality material and services.
Through R&D and adoption of new technologies to diversify
and modernizes mining and beneficiation methods for upgrading
low and medium grade ores and achieve growth and through value
addition.
To improve the productivity, capacity utilization and cost
effectiveness through optimizing both human and physical
resources.
To explore all possibility of cost effective power services for
ferro manganese plant
To make mining areas clean, green and eco friendly.
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To strive for a zero accident rate, by further improving safety
practices.
To insure a high quality of life to the employees and other
stakeholders in the vicinity of the industry.
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Chapter 3.
RESEARCH METHODOLOGY
CONTENTS:
Title of the project
Objectives of the study
Research design
Research Methodology
Title of the project:
STUDY OF CAPITAL BUDGETING AS A TOOL FOR
INVESTMENT DECISION IN MAGANESE ORE INDIA
LIMITED (MOIL)
Research Methodology
Meaning:
Research of Knowledge, Research in common parlance refers to
a research for knowledge. One can also define research as a
scientific and systematic research for pertinent information on aspecific topic. Research is an art of scientific investigation.
Research methodology is away to systematically solve the research
problem. It may be understood as a science how research is done
systematically. In it we study the various steps that are generally
adopted by researcher in studying his research problem along with
logic behind them. It is necessary for the researcher to know not
only the research method/ techniques but also the methodology.
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Definition:
According to oxford dictionary,
A careful enquiry especially through research for new facts in any
branch of knowledge .
Objectives of Research:
The main purpose of research is to discover answer to question
through the application of scientific procedures. The aim of
research is to find out the truth which is hidden and which has not
been discovered as yet. Though each research study has its ownspecific purpose, the proposed study is based on following object.
Described different kinds of capital investment proposals of
MOIL Company.
Identify the factors affecting capital investment decisions of
the company.
Explain different capital budgeting appraisal methods of the
MOIL co.
Evaluate & Rank different capital investment proposal.
Understand different techniques for incorporating risk factor
in capital budgeting.
Wind Mills project(4.80 MW Ratedi project) project is to betaken for capital budgeting(case study) which is installed in 2006-
2007.
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Research Design:-
Research design may be known as arrangement of conditions
for collections and analysis of data, in such a manner that aims to
be relevant to the research purpose with the economy in procedure.It helps in primarily as it facilitates the smooth flow of various
research process. Research design can be define on the basis of
Plan & structure of enquiry, formulated in order to answer the
research question on business aspects. the research plan constitute
of the overall program of the business process and the planning
process include the frame work of entire research process i.e. from
developing the hypothesis the final evolution of collected data.
Research Design can be understood in such a way which that gives
the blue print for collection, measurement analysis of business data.
The design helps researchers to utilize available resource,
efficiently to achieve research objective. As a research design is
very essential
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Chapter 4.
DATA ANALYSIS
Contents
Data Collection methods
1. Primary Data
2. Secondary data
Limitations of the study
Data Collection Method:-
Various methods have been used for the collection of data
in this research. After survey at various organizations it has been
referred by the researcher that an exhaustive study of human
resource is very essential as it had been done and final conclusion
was arrived due to it only. Internet plays a major source of
information for the purpose of study.
The information for the study is obtained from two sources namely.
1. Primary Sources
2. Secondary Source
Primary Sources:
It is the information collected directly without any references. It is
mainly through interactions with concerned officers & staff, either
individually or collectively; some of the information has been
verified or supplemented with personal observation. These sources
include.
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1. Thorough interactions with the various department Managers of
moil.
2. Guidelines given by the Project Guide.
Secondary Sources:
This data is from the number of books and records of the company,
the annual reports published by the company and other magazines.
The secondary data is obtained from the following.
a) Collection of required data from annual records, monthly
records, Internal Published book or profile of manganese ore India
limited.
b) Other books and Journals and magazines
c) Annual Reports of the company.
d)For calculation parts Microsoft Excel sheet is used.
Limitations:
Though the project is completed successfully a few limitations
may be there.
a) Since the procedure and polices of the company will not allow to
disclose confidential financial information, the project has to be
completed with the available data given to us.
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b) The study is carried basing on the information and documents
provided by the organization and based on the interaction with the
various employees of the respective departments.
c) Time limitation. The duration of the project is short to collect therequired information accurately.
D) New projects had not been used for Capital budgeting due to
company does not want to disclosed its new projects. However,
already installed projects of Wind Farms 4.80 MW NAGDA
PROJECT (6 UNITS) & 15.20 MW Ratedi Project (19 units) is to
be taken for Appraisal.
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Chapter 5.
TECHNIQUES OF CAPITAL BUDGETING.
Contents:
1. Non discounted cash flows:
2. Discounted cash flows:
1.Non discounted cash flows:
A. Payback period:
The pay back is one of the most popular & widely recognized
traditional methods of evaluating investment proposal. It is defined
as the number of years required to recover the original cost outlayinvested in a project generates constant annual cash inflow, the
payback period can be computed by dividing cash outlay by the
annual cash flow.
Computation of Payback Period
When the cash inflows are uniform the formula for payback period
is cash outflow divided by annual cash inflow
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Standard:
Select the projects which have payback periods lower than or
equivalent to the stipulated payback period.
Arrange these selected projects in increasing order of their
respective payback periods.
Select those projects from the top of the list till the capital Budget
are exhausted.
Another Standard
In the case of two mutually exclusive projects, the one with a lower
payback period is accepted,
Whenthe respective payback periods are less than or equivalent to
the stipulated payback period.
EXAMPLE: MOIL Ltd. is assessing the purchase of a new
machine for its immediate expansion programme. There are three
possible machines suitable for the purpose.
(Rupees in Lakh)
Particular Machine I Machine II Machine III
Capital cost 300 300 300
Sale(at standard price) 400 350 325
Net cost of productionDirect material 40 50 48
Direct labour 50 30 36
Factory overhead 60 50 58
Administration cost 20 10 15
Selling& Distribution cost 10 10 10
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Condition:
o The economic life of machine 1 is 3 years, while it is 4 years
for the other 2 machines.
o The scrap values are Rs.30,00,000, Rs.25,00,000 , Rs.
20,00,000
o Tax to be paid is expected at 33.175% of the net earnings of
each year
Solution:
Particular Machine I Machine II Machine
III
Capital cost 3,00,00,000 3,00,00,000 3,00,00,000
Life of machine 3 years 4 years 4 years
Sales 4,00,00,000 3,50,00,000 3,25,00,000
(-) Cost of production 1,50,00,000 1,30,00,000 1,42,00,000
(-) Administration cost 20,00,000 10,00,000 15,00,000
(-) Selling & distribution cost 10,00,000 10,00,000 10,00,000
Profit before depreciation&
tax
2,20,00,000 2,00,00,000 1,58,00,000
(-) Depreciation 90,00,000 68,75,000 70,00,000
Profit after depreciation
&before tax
1.30,00,000 1,31,25,000 88,00,000
(-)Tax 33.175% 43,12,750 43,54,190 29,19,400
Profit after depreciation & tax 86,87,250 87,71,810 58,80,600
(+) Depreciation 90,00,000 68,75,000 70,00,000
Net cash inflow 1,76,87,250 1,56,45,810 1,28,80,600
Payback period 1 years 8
month 12
days
1 years
11month
2 years 4
month
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Interpretation:-
In the given condition payback period rule moil as to select the best
machine is I as compare to II & III & the machine I pay back
period as earlier as compare to II & III machine.
In the select the machine I as payback period 1year 8 month 12
days as less as compare to machine II & III. Recover cost of capital
as far as earlier to machine I for that reason have to be selected.
Merits:
simple to compute.
Provides some information on the risk of the investment.
Provides a crude measure of liquidity.
Demerits:
No concreat descison criteria to indicate weather an
investment increases the firms value.
Increases the cash flow beyond the payback period.
Ignores the time value of money and the risk of future cash
flows.
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B.DISCOUNTING PAY BACK PERIOD
Moil Ltd is thinking to install one of the 2 machines A & B
Particular Machines A Machines B
Initial outlay 2,50,00,000 3,40,00,000
CAFT
2013 Nil 90,00,000
2014 50,00,000 1,30,00,000
20151,80,00,000 1,40,00,000
2016 1,40,00,000 1,60,00,000
2017 1,35,00,000 1,40,00,000
Condition:
Cost of Capital is 15% for both machines
Solution:
For machine A
Year Cash inflow PVIF(15% for 5
years)
Present
value
Cumulative
present value
2013 Nil 0.86957 Nil Nil
2014 50,00,000 0.75614 37,80,700 37,80,700
2015 1,80,00,000 0.65752 1,18,35,360 1,56,16,060
2016 1,40,00,000 0.57175 80,04,500 2,36,20,560
2017 1,35,00,000 0.49718 67,11,930 3,03,32,490
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Payback period= 4years 2month 16 days
For machines B:
Year Cash inflow PVIF(15% for 5
years)
Present value Cumulative
present value
2013 90,00,000 0.86957 78,26,130 78,26,130
2014 1,30,00,000 0.75614 98,29,820 1,76,55,950
2015 1,40,00,000 0.65752 92,05,280 2,68,61,230
2016 1,60,00,000 0.57175 91,48,000 3,60,09,230
2017 1,40,00,000 0.49718 69,60,520 4,29,69,750
Payback period = 3years 9month 11 days
Interpretation:-
In the given condition moil have to be selected machine B have for
that first have to be discounting cash inflow after that calculate
payback period for actual amount has to be find out.
Merits:
Consider the time value of money.
Consider the riskiness of the project.
Demerits:
No concreate descison criteria to indicate wheather an
investment increases the firms value.
Requires an estimation of cost of capital.
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C. Accounting rate of return:
Accounting rate of return also known as the return on investment. It
is used to measure the profitability of an investment. The
accounting rate of returns is found out by dividing the average aftertax profit by the average investment.
For Example:
Director of moil Ltd are thinking of new machine to replace to old
one which has been in operation. Charging the depreciation by
fixed instalment method & considering tax rate 33.175% on net
earnings. Suggest which of the following 2 alternatives to analysis
& preferred best one is selected.
Merits:
This method is very simple & popular for the organisation to
find out the return rate of investment
It is very easy to understand the income from the project.
Accounting rate of return can be readily calculated from the
accounting data. No adjustment isrequired to arrive at cash flow of
the projects like in NPV & IRR.
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2. Discounted cash flow technique:
A.Net Present Value (NPV):-
Net present value of an investment/project is the difference
between present value of cash inflows and cash outflows. The
present values of cash flows are obtained at a discount rate
equivalent to the cost of capital.
Accept or reject criterion:-
The net present value can be used as an accept or reject criterion.
In case the NPV is positive the project should be accepted .If the NPV is negative the project should be accepted.
For Example:
MOIL Ltd is contemplating 2 alternative machine A & B. The
cash outflow for both machine
Rs. 4,00,00,000 is present time.
Year CAFT A CAFT B
2013 40,00,000 1,20,00,000
2014 1,20,00,000 1,60,00,000
2015 1,60,00,000 2,00,00,000
2016 2,40,00,000 1,20,00,000
2017 1,60,00,000 80,00,000
The company has targeted return of 10% p.a. on capital.
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Solution:
For machine A
For machine B
Year CAFT B PVIF (10% For 5
Years)
Present value
2013 1,20,00,000 0.90909 1,09,09,080
2014 1,60,00,000 0.82645 1,32,23,200
2015 2,00,00,000 0.75131 1,50,26,200
2016 1,20,00,000 0.68301 81,96,120
2017 80,00,000 0.62092 49,67,360
Total PV 5,23,21,960
(-) total initial invest 4,00,00,000
NPV 1,23,21,960
Year CFAT A PVIF(10% FOR 5
Years)
Present value
2013 40,00,000 0.90909 36,36,360
2014 1,20,00,000 0.82645 99,17,400
2015 1,60,00,000 0.75131 1,20,20,960
2016 2,40,00,000 0.68301 1,63,92,240
2017 1,60,00,000 0.62092 99,34,720
Total PV 5,19,01,680
(-)total initial investment 4,00,00,000
NPV 1,19,01,680
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Interpretation:
In the above net present value concept of the
moil ltd have to be selected machine B for the more profitable
machine as compare to machine A. Machine B is total cashinflow at present time is more positive as compare to machine A.
Machine A is not negative but thats present value of cash inflow
is less as compare to machine B for thats why machine A is not
selected.
Merits:
This method explain weather the investment increases the
firm values.
Consider the time value of money and all cash flows.
Consider the risk of future cash flows (using cost of capital)
Demerits:
Requires an estimation of cost of capital for calculation of
NPV.
2. Profitability Index:
Yet another time- adjusted method of evaluating the investment
proposals is the benefit- cost (B/C.) ratio or profitability index (PI)
Profitability Index is the ratio of the present valued of cash inflows,
at the required rate of return, to the initial cash out flow of the
investment.
Condition:
Profitability Index = Less than one (NPV < 0), NPV is negative
than reject the project.
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Profitability Index = More than one (NPV > 1), NPV is positive
than accept the project.
Profitability Index = Equal to one (NPV =1), NPV is zero& reject
the project.
Following estimation details of moil ltd is given below for the
profitability index of 2 machines
(Rs.in lakh)
Particular Machine x Machine y
Cost of capital 56.125 56.125
Estimated life of machine 5 Years 5Years
Scrap value 3. 3.
Annual income after depreciation & tax
2013 3.375 11.375
2014 5.375 9.375
2015 7.375 7.375
2016 9.375 5.375
2017 11.375 3.375
Company estimating servicing charges at the end of 3 years Rs. 20,00,000 in
case of machine x.
Depreciation has been charged by fixed installation method. Discounting as per
bank rate is current position is 10% p.a.
Analysis the project of moil is which machine is acceptable.
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CALCULATION OUTFLOW OF MACHINEX& Y AT PRESENT TIME.
Particulars Machine X Machine Y
Cost 56,12,500 56,12,500
(+) servicing charges
(20,00,000* 0.75131)
15,02,620 Nil
Total outflow 71,15,120 56,12,500
CALULATION OF DEPRECIATION BY FIXED INSATALLMENT
METHOD FOR MACHINE X & Y
Particular Machine x Machine y
Cost 56,12,500 56,12,500
(-) scrap 3,00,000 3,00,000
Actual value 53,12,500 53,12,500
Life of machine 5 5
Depreciation 10,62,500 10,62,500
Depreciation = cost of machine / life of machine
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For machine X
Year CFAT Depreciation Total
CFAT
PVIF ( 10%
FOR 5 YEAR)
PRESENT
VALUE
2013 3,37,500 10,62,500 14,00,000 0.90909 12,72,726
2014 5,37,500 10,62,500 16,00,000 0.82645 13,22,320
2015 7,37,500 10,62,500 18,00,000 0.75131 13,52,358
2016 9,37,500 10,62,500 20,00,000 0.68301 13,66,020
2017 11,37,500 10,62,500 22,00,000 0.62092 13,66,024
Present value 66,79,448
(+)scrap(3,00,000 * 0.62092) 1,86,276
Total present value 68,65,724
(-)Initial investment 71,15,000
Net present value -2,49,376
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For machine Y
Year CFAT Depreciation Total
CFAT
PVIF ( 10%
FOR 5
YEAR)
PRESENT
VALUE
2013 11,37,500 10,62,500 22,00,000 0.90909 20,00,000
2014 9,37,500 10,62,500 20,00,000 0.82645 16,52,900
2015 7,37,500 10,62,500 18,00,000 0.75131 13,52,358
2016 5,37,500 10,62,500 16,00,000 0.68301 10,92,816
2017 3,37,500 10,62,500 14,00,000 0.62092 8,69,288
Present value 69,67,362
(+)scrap
(3,00,000 * 0.62092)
1,86,276
Total present value 71,53,638
(-)Initial investment 56,12,500
Net present value 15,41,138
Interpretation:-
Profitability index is more than one is positive cash inflow to accept the project
. In above estimation moil have to be select machine Y as compare to machine
X. Because machine Y is positive as & machine X is negative. As per the rule
of profitability index more than one is to accept the project & less than one or
equal to one is to reject the project.
Merits:
This method explain weather the investment increases the firm values. Consider the time value of money and all cash flows. Consider the risk of future cash flows(using cost of capital. Useful in ranking and selecting when capital is rationed.
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Demerits:
May not give the correct decision when mutually exclusive projects istaken.
Requires an estimation of cost of capital for calculation of Profitabilityindex.
C .Internal Rate of Return:-
The internal rate of return method is a discounted cash flow technique
which takes into account the magnitude &timing of cash flows. The concept of
IRR is return rate predict cut-off rate analysis for the actual return of the
investment rate is compare that cut-off rate this rate is greater that project is
good for them to accept.
The internal rate of return can be defined as that rate which equates the
present value of cash inflow with the present value of cash outflow. It is the rate
at the which the NPV of the investment is zero, it is called Internal Rate because
it is depends on the outlay and proceeds associated with the investment.
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For Example:
Moil Ltd has to be decided the estimate of the purchase of machinery for the
beneficiary of the organisation in the future time. Two machinery are available
to estimate that calculation of IRR.
Cash outflow for both the Machinery Rs. 1,00,00,000
Cash inflow of both the machinery:
Year Machine X Machine Y
2013 10,00,000 50,00,000
2014 20,00,000 40,00,000
2015 30,00,000 30,00,000
2016 40,00,000 20,00,000
2017 50,00,000 10,00,000
Solution:
Formula of Internal rate of return (IRR):
IRR = % of Present Value of Positive NPV rate + NPV x Difference in
% of NPV rate
Difference in NPV
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For Machine X
Year Cash in
Flow
PVIF (10%
for 5 yrs)
NPV PVIF (15%
for 5 yrs)
NPV
2013 10,00,000 0.90909 9,09,090 0.86956 8,69,560
2014 20,00,000 0.82645 16,52,900 0.75614 15,12,280
2015 30,00,000 0.75131 22,53,930 0.65751 19,72,530
2016 40,00,000 0.68301 27,32,040 0.57175 22,87,000
2017 50,00,000 0.62092 31,04,600 0.49717 24,85,850
Total Present Value 1,06,52,560 91,27,220
Initial Investment (-
)1,00,00,000
(-
)1,00,00,000
Net Present Value 6,52,560 (-)8,72,780
IRR= 10 % + (652560/ 1525340) * 5 %
Internal Rate of Return (IRR) =12.14
For Machine Y
Year Cash in
Flow
PVIF (15%
for 5 yrs)
NPV PVIF (25%
for 5 yrs)
NPV
2013 50,00,000 0.86956 43,47,800 0.80000 40,00,000
2014 40,00,000 0.75614 30,24,560 0.64000 25,60,000
2015 30,00,000 0.65751 19,72,530 0.51200 15,36,000
2016 20,00,000 0.57175 11,42,500 0.40960 8,13,800
2017 10,00,000 0.49717 4,97,170 0.32768 3,27,680
Total Present Value 1,09,84,560 92,37,480
Initial Investment (-
)1,00,00,000
(-
)1,00,00,000
Net Present Value 9,84,560 -7,62,520
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IRR= 15 % + (984560 / 1747080) * 10 %
= 20.64 %
Interpretation:-
Internal rate of return is also depends of company cut-off rate like company is
estimating minimum rate of return on machinery is 15%. More than return of
cut-off rate is to be accept the project. Moil is to select the machine Y for the
return of the investment more than cut-off rate i.e.20.64% is more than cut-off
rate &another of machine X is less as compare to cut-off rate for that reason
is to reject the machine X.
Merits:
This method explain wheather the investment increases the firm values. Consider the time value of money and all cash flows. Consider the risk of future cash flows(using cost of capital.
Demerits:
May not give the correct descison when mutually exclusive projects istaken.
Requires an estimation of rate of return for calculation of IRR.
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CHAPTER 6:
Proposed Project & Expansion
MINE EXPANSION PROJECTS UNDERTAKEN BY MOIL (MOU-2013-
14)
Sr.
No.
Description of Project Status Benefits from the Project
1 Sinking of vertical shaft4.5 mtr. dia and 156mtr. depth with winder,headgear, surface
infrastructure, ore
passes, second outlet, ,loading stations etc. andallied works at MunsarMine.
Installation ofpermanent headgearcompleted. Sinking,Lining, equipping and
installation of
permanent winder inprogress. Project isrunning as per schedule.
Projected production from this shaft is0.60 lac. Ton per year from 2018-19.
Scheduled completion of the project isin May-2014. After completion of theproject, underground development to
approach to the ore zone will beundertaken at different working levels.Schedule for Start & completion ofunderground development activities-
2014-15- 2016-17 - 1st. level(40mtrs)
2015-16- 2018-19 - 2nd
. Level(70mtrs)
2015-16- 2018-19 - 3rd
. level(100mtr)
2016-172019-20 - 4th
. level(130mtr.)
Present production is 0.15 lac. Ton peryear from underground. Yearwise
Projected production from this shaft is2014-15- 0.20 lac Ton2015-16- 0.30 lac Ton2016-17- 0.40 lac Ton2017-18- 0.50 lac Ton
2018-19- 0.60 lac Ton
2. Sinking of vertical shaft4.5 mtr. dia and 134mtr. depth with winder,headgear, surfaceinfrastructure, orepasses, second outlet, ,loading stations etc. andallied works at UkwaMine.
Installation ofpermanent headgearcompleted. Sinking,Lining, equipping andinstallation ofpermanent winder inprogress. Project isrunning as per schedule.
Projected production from this shaft is0.65 lac. Ton per year from 2019-20.
Scheduled completion of the project isin August-2014. After completion of theproject underground development toapproach to the ore zone will beundertaken at different working levels.Schedule for Start & completion ofunderground development activities-
2014-15- 2017-18 - 1st. level (60mtr)
2015-16- 2018-19 - 2nd
. Level(90mtr)
2015-16- 2018-19 - 3rd
. level(120mtr)
Present level of production fromunderground is 0.30 lac. Ton per year
through Inclines. Projected productionfrom this shaft is
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2016-17- 0.35 lac Ton2017-18- 0.40 lac Ton2018-19- 0.55 lac Ton2019-20 0.65 lac. Ton
3. Deepening of Holmesshaft from 12
th.
level(300mtrs.) to 16level (435 mtrs.) 135mtrs.
At Balaghat Mine
Work started from Nov.2012 and preparatorywork such as sinkingwinder chamber,orepass chamber, drivefor head/deflectionpully at 12th. level(300mtrs.) completed.Installation of sinkingwinder and sinking oforepass at 12
th. level
(300mtrs.) in progress.
Scheduled completion of the project isin Nov.-2016.
Deepening of Holmes shaft is beingundertaken to sustain the production andalso to increase of production by 0.60
lac. Ton per year.
Present level of production is 3.0 lac.Ton per year. By deepening ofProduction shaft (project completed in
2011) & corresponding undergrounddevelopment at 13.5 L(345 mtrs.) &
15L (390mtrs.) it will go upto 3.60 lac.
Ton per year by 2015-16.By the deepening of Holmes shaft and
corresponding underground
development at 16L(435 mtrs.)production will go upto 4.20 lac. Ton
per year by 2017-18.
4. Sinking of 7.5 mtrs. dia.650 mtrs. depth verticalhigh speed shaft withthree nos. frictionwinders and allied
works at Balaghat
Mine
Global tendering done ,offers received in threeparts. Scrutiny andtechnical discussion ofPart-I in progress.
Projected production from this shaft is8.0 lac. Ton per year
Scheduled completion of the project isin 2016-17 . After completion of theproject underground development toapproach to the ore zone will beundertaken at different working levels.Schedule for Start & completion ofunderground development activities-
2016-17- 2018-19 - 16.5 level(435 mtrs.)
2017-18- 2019-20 - 18 level(480 mtrs.)
2017-18- 2019-20 - 19.5 level(525 mtrs.)
2018-19- 2020-21 - 21 level(570 mtrs.)
2018-19- 2021-22 - 22.5 level(615 mtrs.)
Projected production from this shaft is2017-18- 0.60 lac Ton2018-19- 1.00 lac Ton2019-20- 2.50 lac Ton2020-21- 4.00 lac Ton2021-22- 5.00 lac Ton2022-23- 6.00 lac Ton2023-24- 7.00 lac Ton2024-25- 8.00 lac Ton
5. Deepening of vertical
shaft from -270level(109 mtrs.) to -
Placement of work
order is expected inFeb.- 2013.
Shaft deepening is being done to sustainthe production of chikla Mine which is0.80 lac. Ton per year.
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470 level(169 mtrs.),60 Mtrs. ,size of theshaft is circular having4.5 Mtrs. Diameter at
Chikla Mine.
Scheduled completion of the project isin Aug.- 2015. After completion of theproject underground development toapproach to the ore zone will beundertaken at different working levels.
Schedule for Start & completion ofunderground development activities-2015-16- 2017-18 - 3
rd.. level(139 mtrs.)
2016-17- 2018-19 - 4th
. level(169 mtrs.)
6. Sinking of 6.5 Mtrs.Dia., 308 Mtrs. depth
2nd
. High speed shaftwith 2 nos. frictionwinders, headgear,surface infrastructure,
ore passes, secondoutlet, , loading stationsetc. at Gumgaon Mine.
Work of Designing ofshaft installation and
preparation/ evaluationof Feasibility reportawarded to M/sCMPDIL Ranchi which
is in progress.Pre-inception studiessuch as core drilling &
Hydrogeology at thelocation of shaft is inprogress.
It will work in new ore zone located inwestern part of the ore body to extractthe ore from the levels below- 4Level(190mtrs.)
Projected Production from this shaft is1.30 Lac. Ton per year after
corresponding undergrounddevelopment for approach to ore bodyat different underground levels.
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CHAPTER 7:Business Diversification:
Wind farms project of Moil at Ratedi Hill, Dist. Dewas (M.P.) for4.80 MW
(6 units).
Introduction to wind farms
MOIL is the first public sector company in the country to
install wind farms for captive power requirement and to promotenon conventional energy resources.
During 2005-2006 MOIL has commissioned a 4.80 MW wind
farm at NAGDA hills wind farm at NAGDA hills near DEWAS in
MP.
Another wind farm of 15.20 MW consisting 19 nos wind
turbines of 800 KW each commissioned at PATEDI hills.
Total wind energy capacity of MOIL ltd is 20.00 MW.
MOIL wind farm has generated 1755.10 lakh has genereated
17655.10 lakh units of electricity since its inception.
20 MW Wind mill at Nagda and Ratedi near Dewas(MP)
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Capital Budgeting of 4.80 MW machinery at NAGDA PROJECT
using
Non discounted cash flows:
1 .Total investment of the project is to be taken from internal cash
no debt (loan to be taken) for installing the project.
2 .Cost of capital is assumed to be 14% as if company not using
this 15 crore cash in this investment then company get an annual
return of 14% through investment which is the opportunity cost of
capital.
3 .Rate of return for this project is to be taken as 15.855.
4 .The estimated life of the project is for 10 years.
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1.Payback period:
4.80 Nagda project(6 units)(in crores)
year Investment Gross revenue cash expenses cash profit Cumm cash
profitgross 22.2
Investment
2006-2007
Less-TAXbenefit
7.326
at33%
Net 14.874
2006-2007 2.94 0 2.94 2.94
2007-2008 4.01 0 4.01 6.952008-2009 4.8 0.24 4.56 4.56
2009-2010 4.46 0.3 4.16 8.72
20010-2011 4.21 0.31 3.9 12.62
20011-2012 5.7 0.3 5.4 18.02
Interpretation :
Payback period=no of years+(cash outflow-required cash inflow)/annual
cash inflow*12.
Since on 5 year 12.62 crore is recovered
Therefore Payback period= 5+(14.874-12.62)/3.9*12= 5 years 6 monthsSo payback period is 5 years 6 months
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2.Discounted payback period:
4.80 Nagda project(6 units)(in crores)
Year Investment Grossrevenue cashexpenses cashprofit Pv Cummpv
gross 22.2
Investment
2006-2007
Less-TAXbenefit 7.326
at 33%
Net 14.874
2006-2007 2.94 0 2.94 2.578968 2.578968
2007-2008 4.01 0 4.01 3.085294 5.664262
2008-2009 4.8 0.24 4.56 3.077544 8.741806
2009-2010 4.46 0.3 4.16 2.463136 11.20494
20010-2011 4.21 0.31 3.9 2.02566 13.2306
20011-2012 5.7 0.3 5.4 2.46024 15.69084
Discounted payback period:5 years 6 months
Interpretation:Discounted payback period is 5 years 6 months.
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Capital Budgeting of 4.80 MW machinery at NAGDA PROJECT using
Discounted cash flows:
1.Calculation by using NPV
4.80 Nagda project(6 units) Rs. in crores
Year InvestmentGrossrevenue
cashexpenses
cashprofit
NPV at14%
PVF @14.85%
NPV at14.85%
grossinvestment
22.2
2006-2007
Less-TAXbenefit
7.326
at 33%
Net 14.874
2006-2007 2.94 0 2.94 2.578968 0.8707 2.559858
2007-2008 4.01 0 4.01 3.085294 0.7581 3.039981
2008-2009 4.8 0.24 4.56 3.077544 0.66 3.0096
2009-2010 4.46 0.3 4.16 2.463136 0.5747 2.390752
2010-2011 4.21 0.31 3.9 2.02566 0.5004 1.95156
2011-2012 5.7 0.3 5.4 2.46024 0.4357 2.35278
PV of
cashprofit:
15.69 15.30453
Interpretation:1.PV of cash profit@ 14%=15.69
Less:Initial investment=14.874
Net present value=0.816
2.PV of cash profit @ 14.85%=15.30453
Less:Initial investment=14.874
Net present value:0.4303.Therefore Discounted factor should be more than 15 % so that the NPV come
close to Zero.
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2. Calculation by using IRR.
Interpretation:
P.V required=14.874
P.V at 15.85%=14.86904
P.V at 16%=14.80626
Actual IRR should be more than 16%.
4.80 MW Nagda project(6 units) rupees in crores.
Year Investment
Gross
revenue
cash
expenses
cash
profit
Irr at
15.85% Npv
Irr at
16% Npv
Gross 22.2
Investment
2006-2007
Less-TAX
benefit 7.326at33%
Net 14.874
2006-2007 2.94 0 2.94 0.8631 2.537514 0.862 2.53428
2007-2008 4.01 0 4.01 0.745 2.98745 0.74316 2.980072
2008-2009 4.8 0.24 4.56 0.6431 2.932536 0.6406 2.921136
2009-2010 4.46 0.3 4.16 0.5551 2.309216 0.5523 2.297568
20010-2011 4.21 0.31 3.9 0.4792 1.86888 0.47611 1.856829
20011-2012 5.7 0.3 5.4 0.4136 2.23344 0.41044 2.216376
Total Cash
profit 14.869 14.8063
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3. Calculation by using profitability index:
4.80 Nagda project(6 units)(in crores)
Year InvestmentGrossrevenue
cashexpenses
cashprofit
PVF @14% PV
gross 22.2
Investment
2006-2007
Less-TAXbenefit 7.326
at 33%
Net 14.874 1.14 -16.91
2006-2007 2.94 0 2.94 0.8772 2.578968
2007-2008 4.01 0 4.01 0.7694 3.085294
2008-2009 4.8 0.24 4.56 0.6749 3.077544
2009-2010 4.46 0.3 4.16 0.5921 2.463136
20010-2011 4.21 0.31 3.9 0.5194 2.02566
20011-2012 5.7 0.3 5.4 0.4556 2.46024
Profitability Index:1.054917
Interpretation:
Since profitability index is greater than 1 so the project can be accepted.
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Chapter 8:
CONCLUSION:
Project appraisal By various
techniques
Rate Values
Non Discounted Cash Flows:
1.payback Period: 5 years 6
months
2.Discounted Payback Period; 5 years 6
months
Discounted Cash Flows:
1.Net Present Value @ 14% 0.816
@14.85% 0.4303
2.Iinternal Rate of Return: @15.85% 14.86904
@16% 14.806
3.Profitability Index: 1.04917
Payback period for the Nagda project is 5 years 6 months that means theactual investment is gained during 5 years 6 months after this the
whatever cash inflow is generated is the profit for the company.
Net present value comes to be positive at the both rate 14% and 14.85%. IRR to be taken as 15.85% but it to be estimated that it should be more
than 16% so that the net present value comes to be zero.
Profitability index is greater then 1 which concludes that project has goodfuture growth and profitable for the company to accept this project.
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In MOIL for Capital Budgeting Discounted cash flow technique IRR isused for project appraisal and since NPV is positive for 15.85% if IRR as
discounted factor so the project is effective for the company
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Chapter 9.
Suggestions
MOIL has different user tailor made software for all departments, I suggestto get it ERP, so that each &every report can be accruable at one point.
Projects- I suggest MOIL should monitor each & every Project to ensuretimely completion, so that it would not be overrun in terms of cost & time.
By improving better quality, MOIL can ensure much better price & turnover.MOIL has large cash reserves; I suggest company may invest in other project
or other value addition segments.
Permission from ministry & finalization process is very slow, project goesunder cost overrun.
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References & Bibliography:
Books:
1. Financial Management Author: Ravi Kishore.
2. Financial Management Author: I. M. Pandey
Websites: www.moil.nic.
Annual Reports: 2006-2007 to 2011-2012 of MOIL