prinkal final one

7/28/2019 Prinkal Final One

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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:


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:


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

prinkal final one

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