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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

modern times. It involves decisions to commit the fir ms 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.

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

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 highly valuable for decision making.

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.

(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 the probabilities 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.

Chapter 2.
COMPANY PROFILE:

A Miniratna PSU was originally set up in the year 1896 as Central Province Prospecting Syndicate which was later renamed as Central 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

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.

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 two products 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 Ratedi Hills Dist. Dewas, Madhya Pradesh which generates 332.14 Lakh

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.

Sr.no.

Mines Names &ADDRESS

MAHARASHTRA 1. 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

LIST OF WIND FARMS MADHYA PRADESH 1. Nagda Hills, Dist. Dewas, M.P 2. Ratedi Hills, Dist. Dewas, M.P Source: Annual report of MOIL 2010-11

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.

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.

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 a specific 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.

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 own specific 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 be taken for capital budgeting(case study) which is installed in 20062007.

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

Chapter 4.
DATA ANALYSIS Contents 1. 2. Data Collection methods Primary Data 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.

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.

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 the required 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.

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 outlay invested 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

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 Capital cost Sale(at standard price) Net cost of production Direct material Direct labour Factory overhead Administration cost Selling& Distribution cost 40 50 60 20 10 50 30 50 10 10 48 36 58 15 10 Machine I 300 400 Machine II 300 350 Machine III 300 325

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 20,00,000 , Rs.

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 Life of machine Sales (-) Cost of production (-) Administration cost (-) Selling & distribution cost 3,00,00,000 3 years 4,00,00,000 1,50,00,000 20,00,000 10,00,000 3,00,00,000 4 years 3,50,00,000 1,30,00,000 10,00,000 10,00,000 2,00,00,000 3,00,00,000 4 years 3,25,00,000 1,42,00,000 15,00,000 10,00,000 1,58,00,000

Profit before depreciation& 2,20,00,000 tax (-) Depreciation Profit after 90,00,000 depreciation 1.30,00,000

68,75,000 1,31,25,000

70,00,000 88,00,000

&before tax (-)Tax 33.175% 43,12,750 43,54,190 87,71,810 68,75,000 1,56,45,810 8 1 29,19,400 58,80,600 70,00,000 1,28,80,600

Profit after depreciation & tax 86,87,250 (+) Depreciation Net cash inflow Payback period 90,00,000 1,76,87,250 1 years

years 2 years 4 month

month days

12 11month

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.

B.DISCOUNTING PAY BACK PERIOD Moil Ltd is thinking to install one of the 2 machines A & B Particular Initial outlay CAFT 2013 2014 2015 2016 2017 Nil 50,00,000 1,80,00,000 1,40,00,000 1,35,00,000 90,00,000 1,30,00,000 1,40,00,000 1,60,00,000 1,40,00,000 Machines A 2,50,00,000 Machines B 3,40,00,000

Condition: Cost of Capital is 15% for both machines

Solution: For machine A Year Cash inflow PVIF(15% for 5 Present years) 2013 2014 2015 2016 2017 Nil 50,00,000 1,80,00,000 1,40,00,000 1,35,00,000 0.86957 0.75614 0.65752 0.57175 0.49718 value Nil 37,80,700 1,18,35,360 80,04,500 67,11,930 Cumulative present value Nil 37,80,700 1,56,16,060 2,36,20,560 3,03,32,490

Payback period= 4years 2month 16 days

For machines B: Year Cash inflow PVIF(15% years) 2013 2014 2015 2016 2017 90,00,000 1,30,00,000 1,40,00,000 1,60,00,000 1,40,00,000 0.86957 0.75614 0.65752 0.57175 0.49718 78,26,130 98,29,820 92,05,280 91,48,000 69,60,520 for 5 Present value Cumulative present value 78,26,130 1,76,55,950 2,68,61,230 3,60,09,230 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.

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 after tax 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.

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 2013 2014 2015 2016 2017

CAFT A 40,00,000 1,20,00,000 1,60,00,000 2,40,00,000 1,60,00,000

CAFT B 1,20,00,000 1,60,00,000 2,00,00,000 1,20,00,000 80,00,000

The company has targeted return of 10% p.a. on capital.

Solution: For machine A CFAT A

Year

PVIF(10% Years)

FOR

5 Present value

2013 2014 2015 2016 2017 Total PV

40,00,000 1,20,00,000 1,60,00,000 2,40,00,000 1,60,00,000

0.90909 0.82645 0.75131 0.68301 0.62092

36,36,360 99,17,400 1,20,20,960 1,63,92,240 99,34,720 5,19,01,680 4,00,00,000 1,19,01,680

(-)total initial investment NPV For machine B CAFT B

Year

PVIF (10% For 5 Present value Years)

2013 2014 2015 2016 2017 Total PV

1,20,00,000 1,60,00,000 2,00,00,000 1,20,00,000 80,00,000

0.90909 0.82645 0.75131 0.68301 0.62092

1,09,09,080 1,32,23,200 1,50,26,200 81,96,120 49,67,360 5,23,21,960 4,00,00,000 1,23,21,960

(-) total initial invest NPV

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 cash inflow 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.

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 Cost of capital Estimated life of machine Scrap value Machine x 56.125 5 Years 3. Machine y 56.125 5Years 3.

Annual income after depreciation & tax 2013 2014 2015 2016 2017 3.375 5.375 7.375 9.375 11.375 11.375 9.375 7.375 5.375 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.

CALCULATION OUTFLOW OF MACHINEX& Y AT PRESENT TIME.

Particulars Cost (+) servicing charges (20,00,000* 0.75131) Total outflow

Machine X 56,12,500 15,02,620

Machine Y 56,12,500 Nil

71,15,120

56,12,500

CALULATION

OF

DEPRECIATION

BY

FIXED

INSATALLMENT

METHOD FOR MACHINE X & Y

Depreciation = cost of machine / life of machine

Particular Cost (-) scrap Actual value Life of machine Depreciation

Machine x 56,12,500 3,00,000 53,12,500 5 10,62,500

Machine y 56,12,500 3,00,000 53,12,500 5 10,62,500

For machine X

Year

CFAT

Depreciation Total CFAT

PVIF

10% PRESENT VALUE 12,72,726 13,22,320 13,52,358 13,66,020 13,66,024 66,79,448 1,86,276 68,65,724 71,15,000 -2,49,376

FOR 5 YEAR) 0.90909 0.82645 0.75131 0.68301 0.62092

2013 2014 2015 2016 2017

3,37,500 5,37,500 7,37,500 9,37,500 11,37,500

10,62,500 10,62,500 10,62,500 10,62,500 10,62,500

14,00,000 16,00,000 18,00,000 20,00,000 22,00,000

Present value (+)scrap(3,00,000 * 0.62092) Total present value (-)Initial investment Net present value

For machine Y

Year

CFAT

Depreciation Total CFAT

PVIF ( 10% PRESENT FOR YEAR) 5 VALUE

2013 2014 2015 2016 2017

11,37,500 9,37,500 7,37,500 5,37,500 3,37,500

10,62,500 10,62,500 10,62,500 10,62,500 10,62,500

22,00,000 20,00,000 18,00,000 16,00,000 14,00,000

0.90909 0.82645 0.75131 0.68301 0.62092

20,00,000 16,52,900 13,52,358 10,92,816 8,69,288 69,67,362 1,86,276

Present value (+)scrap (3,00,000 * 0.62092) Total present value (-)Initial investment Net present value

71,53,638 56,12,500 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.

Demerits: May not give the correct decision when mutually exclusive projects is taken. Requires an estimation of cost of capital for calculation of Profitability index.

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.

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 2013 2014 2015 2016 2017 Machine X 10,00,000 20,00,000 30,00,000 40,00,000 50,00,000 Machine Y 50,00,000 40,00,000 30,00,000 20,00,000 10,00,000

Solution: Formula of Internal rate of return (IRR):

IRR = % of Present Value of Positive NPV rate + NPV % of NPV rate Difference in NPV

x Difference in

For Machine X Year Cash Flow 2013 2014 2015 2016 2017 10,00,000 20,00,000 30,00,000 40,00,000 50,00,000 in PVIF (10% NPV PVIF (15% NPV

for 5 yrs) 0.90909 0.82645 0.75131 0.68301 0.62092 9,09,090 16,52,900 22,53,930 27,32,040 31,04,600 1,06,52,560 ()1,00,00,000

for 5 yrs) 0.86956 0.75614 0.65751 0.57175 0.49717 8,69,560 15,12,280 19,72,530 22,87,000 24,85,850 91,27,220 ()1,00,00,000 (-)8,72,780

Total Present Value Initial Investment

Net Present Value

6,52,560

IRR= 10 % + (652560/ 1525340) * 5 % Internal Rate of Return (IRR) =12.14 For Machine Y

Year

Cash Flow

in PVIF (15% NPV for 5 yrs) 0.86956 0.75614 0.65751 0.57175 0.49717 43,47,800 30,24,560 19,72,530 11,42,500 4,97,170 1,09,84,560 ()1,00,00,000

PVIF (25% NPV for 5 yrs) 0.80000 0.64000 0.51200 0.40960 0.32768 40,00,000 25,60,000 15,36,000 8,13,800 3,27,680 92,37,480 ()1,00,00,000 -7,62,520

2013 2014 2015 2016 2017

50,00,000 40,00,000 30,00,000 20,00,000 10,00,000

Total Present Value Initial Investment

Net Present Value

9,84,560

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 is taken. Requires an estimation of rate of return for calculation of IRR.

CHAPTER 6:
Proposed Project & Expansion

MINE EXPANSION PROJECTS UNDERTAKEN BY MOIL (MOU-201314)


Sr. No. Description of Project 1. Sinking of vertical shaft 4.5 mtr. dia and 156 mtr. depth with winder, headgear, surface infrastructure, ore passes, second outlet, , loading stations etc. and allied works at Munsar Mine. Status Benefits from the Project

Installation of Projected production from this shaft is permanent headgear 0.60 lac. Ton per year from 2018-19. completed. Sinking, Scheduled completion of the project is Lining, equipping and in May-2014. After completion of the installation of project, underground development to permanent winder in approach to the ore zone will be progress. Project is undertaken at different working levels. running as per schedule. Schedule for Start & completion of underground development activities2014-15- 2016-17 2015-16- 2018-19 2015-16- 2018-19 2016-17 2019-20 1st. level(40mtrs) 2nd. Level(70mtrs) - 3rd. level(100mtr) 4th. level(130mtr.)

Present production is 0.15 lac. Ton per year from underground. Yearwise Projected production from this shaft is 2014-15- 0.20 lac Ton 2015-16- 0.30 lac Ton 2016-17- 0.40 lac Ton 2017-18- 0.50 lac Ton 2018-19- 0.60 lac Ton 2. Sinking of vertical shaft 4.5 mtr. dia and 134 mtr. depth with winder, headgear, surface infrastructure, ore passes, second outlet, , loading stations etc. and allied works at Ukwa Mine. Installation of Projected production from this shaft is permanent headgear 0.65 lac. Ton per year from 2019-20. completed. Sinking, Scheduled completion of the project is Lining, equipping and in August-2014. After completion of the installation of project underground development to permanent winder in approach to the ore zone will be progress. Project is undertaken at different working levels. running as per schedule. Schedule for Start & completion of underground development activities2014-15- 2017-18 2015-16- 2018-19 2015-16- 2018-19 1st. level (60mtr) 2nd. Level(90mtr) - 3rd. level(120mtr)

Present level of production from underground is 0.30 lac. Ton per year through Inclines. Projected production from this shaft is

2016-172017-182018-192019-20 3. Deepening of Holmes shaft from 12th. level(300mtrs.) to 16 level (435 mtrs.) 135 mtrs. At Balaghat Mine

0.35 lac Ton 0.40 lac Ton 0.55 lac Ton 0.65 lac. Ton

Work started from Nov. Scheduled completion of the project is 2012 and preparatory in Nov.-2016. work such as sinking Deepening of Holmes shaft is being winder chamber, undertaken to sustain the production and orepass chamber, drive also to increase of production by 0.60 for head/deflection lac. Ton per year. pully at 12th. level Present level of production is 3.0 lac. (300mtrs.) completed. Ton per year. By deepening of Installation of sinking Production shaft (project completed in winder and sinking of 2011) & corresponding underground orepass at 12th. level development at 13.5 L(345 mtrs.) & (300mtrs.) in progress. 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. Global tendering done , Projected production from this shaft is offers received in three 8.0 lac. Ton per year parts. Scrutiny and Scheduled completion of the project is technical discussion of in 2016-17 . After completion of the Part-I in progress. project underground development to approach to the ore zone will be undertaken at different working levels. Schedule for Start & completion of underground development activities2016-17- 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.)

4.

Sinking of 7.5 mtrs. dia. 650 mtrs. depth vertical high speed shaft with three nos. friction winders and allied works at Balaghat Mine

5.

Projected production from this shaft is 2017-18- 0.60 lac Ton 2018-19- 1.00 lac Ton 2019-20- 2.50 lac Ton 2020-21- 4.00 lac Ton 2021-22- 5.00 lac Ton 2022-23- 6.00 lac Ton 2023-24- 7.00 lac Ton 2024-25- 8.00 lac Ton Deepening of vertical Placement of work Shaft deepening is being done to sustain shaft from -270 order is expected in the production of chikla Mine which is level(109 mtrs.) to - Feb.- 2013. 0.80 lac. Ton per year.

470 level(169 mtrs.), 60 Mtrs. ,size of the shaft is circular having 4.5 Mtrs. Diameter at Chikla Mine.

Scheduled completion of the project is in Aug.- 2015. After completion of the project underground development to approach to the ore zone will be undertaken at different working levels. Schedule for Start & completion of underground development activities2015-16- 2017-18 - 3rd.. level(139 mtrs.) 2016-17- 2018-19 - 4th. level(169 mtrs.)

6.

Sinking of 6.5 Mtrs. Dia., 308 Mtrs. depth 2nd. High speed shaft with 2 nos. friction winders, headgear, surface infrastructure, ore passes, second outlet, , loading stations etc. at Gumgaon Mine.

Work of Designing of It will work in new ore zone located in shaft installation and western part of the ore body to extract preparation/ evaluation the ore from the levels below- 4Level of Feasibility report (190mtrs.) awarded to M/s Projected Production from this shaft is CMPDIL Ranchi which 1.30 Lac. Ton per year after is in progress. corresponding underground Pre-inception studies development for approach to ore body such as core drilling & at different underground levels. Hydrogeology at the location of shaft is in progress.

CHAPTER 7:
Business Diversification: Wind farms project of Moil at Ratedi Hill, Dist. Dewas (M.P.) for 4.80 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 promote non 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)

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.

1.Payback period:

4.80 Nagda project(6 units)(in crores)


year gross Investment 2006-2007 Less-TAX benefit at 33% Net 2006-2007 2007-2008 2008-2009 2009-2010 20010-2011 20011-2012 Investment 22.2 Gross revenue cash expenses cash profit Cumm profit cash

7.326

14.874 2.94 4.01 4.8 4.46 4.21 5.7 0 0 0.24 0.3 0.31 0.3 2.94 4.01 4.56 4.16 3.9 5.4 2.94 6.95 4.56 8.72 12.62 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 months So payback period is 5 years 6 months

2.Discounted payback period:

4.80 Nagda project(6 units)(in crores)


Year gross Investment 2006-2007 Less-TAX benefit at 33% Net 2006-2007 2007-2008 2008-2009 2009-2010 20010-2011 20011-2012 Investment 22.2 Gross revenue cash expenses cash profit Pv Cumm pv

7.326 14.874 2.94 4.01 4.8 4.46 4.21 5.7 0 0 0.24 0.3 0.31 0.3 2.94 4.01 4.56 4.16 3.9 5.4 2.578968 3.085294 3.077544 2.463136 2.02566 2.46024 2.578968 5.664262 8.741806 11.20494 13.2306 15.69084

Discounted payback period:5 years 6 months

Interpretation: Discounted payback period is 5 years 6 months.

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 gross investment 2006-2007 Less-TAX benefit at 33% Net 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 Investment 22.2 Gross revenue cash expenses cash profit NPV 14% at PVF @ NPV at 14.85% 14.85%

7.326 14.874 2.94 4.01 4.8 4.46 4.21 5.7 0 0 0.24 0.3 0.31 0.3 2.94 4.01 4.56 4.16 3.9 5.4 2.578968 3.085294 3.077544 2.463136 2.02566 2.46024 0.8707 0.7581 0.66 0.5747 0.5004 0.4357 2.559858 3.039981 3.0096 2.390752 1.95156 2.35278 15.30453

PV of cash 15.69 profit:

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.

2. Calculation by using IRR.

4.80 MW Nagda project(6 units) rupees in crores.


Gross revenue cash expenses cash profit Irr at 15.85% Npv Irr at 16% Npv

Year Gross Investment 2006-2007 Less-TAX benefit at 33% Net 2006-2007 2007-2008 2008-2009 2009-2010 20010-2011 20011-2012

Investment 22.2

7.326 14.874 2.94 4.01 4.8 4.46 4.21 5.7 0 0 0.24 0.3 0.31 0.3 2.94 4.01 4.56 4.16 3.9 5.4 Total profit 0.8631 0.745 0.6431 0.5551 0.4792 0.4136 Cash 2.537514 2.98745 2.932536 2.309216 1.86888 2.23344 14.869 0.862 0.74316 0.6406 0.5523 0.47611 0.41044 2.53428 2.980072 2.921136 2.297568 1.856829 2.216376 14.8063

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%.

3. Calculation by using profitability index:

4.80 Nagda project(6 units)(in crores)


Year gross Investment 2006-2007 Less-TAX benefit at 33% Net 2006-2007 2007-2008 2008-2009 2009-2010 20010-2011 20011-2012 Investment 22.2 Gross revenue cash expenses cash profit PVF 14% @ PV

7.326 14.874 2.94 4.01 4.8 4.46 4.21 5.7 0 0 0.24 0.3 0.31 0.3 2.94 4.01 4.56 4.16 3.9 5.4 1.14 0.8772 0.7694 0.6749 0.5921 0.5194 0.4556 -16.91 2.578968 3.085294 3.077544 2.463136 2.02566 2.46024

Profitability Index:1.054917

Interpretation: Since profitability index is greater than 1 so the project can be accepted.

Chapter 8:
CONCLUSION:

Project appraisal techniques

By

various Rate

Values

Non Discounted Cash Flows: 1.payback Period: 2.Discounted Payback Period; 5 years months 5 years months 6 6

Discounted Cash Flows: 1.Net Present Value @ 14% @14.85% 2.Iinternal Rate of Return: @15.85% @16% 3.Profitability Index: 0.816 0.4303 14.86904 14.806 1.04917

Payback period for the Nagda project is 5 years 6 months that means the actual 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 good future growth and profitable for the company to accept this project.

In MOIL for Capital Budgeting Discounted cash flow technique IRR is used for project appraisal and since NPV is positive for 15.85% if IRR as discounted factor so the project is effective for the company

Chapter 9.
Suggestions MOIL has different user tailor made software for all departments, I suggest to get it ERP, so that each &every report can be accruable at one point. Projects- I suggest MOIL should monitor each & every Project to ensure timely 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 goes under cost overrun.

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

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