A Project on ³Economic Value Added´ In Kirloskar Oil Engines Ltd.

RUTIKA KALE. MBA-07003059

Project title : ³Economic Value Added´ Scope of study : Study focuses on calculation of Economic Value Added (2003-2007) and encompasses on capital structure and cost of capital. Period of study : Secondary financial data of 5 years ( 2003. Pune.Executive Summary     Name of the Company: Kirloskar Oil Engines Ltd.2007) is used to measure EVA .

Tools for data analysis: Formula of EVA is used to analyze EVA. 2. Research Methodology: Annual Reports Company Website Objectives of the study: To measure the Economic Value Added (EVA) of the organization. To suggest strategic path for improvement of EVA  1. M. 2.  1.Continued« ‡ 1. 2. . Excel. S.

200-hp range commanding roughly 17% market share. irrigation pump sets. engine bearings and valves and gray iron castings.Highest national Award for Design Innovation QS 9000 certification for engine bearings since 1998 . KOEL is Awarded as ISO 9001 certification since 1992 . 1997 and 2003. . Its products range includes diesel engines. Golden Peacock. Nasik.Profile of Kirloskar Oil Engines Ltd      Kirloskar Oil Engines (KOEL) was incorporated in 1946 . diesel generating sets. Its manufacturing units are at Ahmednagar. & Kagal in Maharashtra. KOEL manufactures diesel engines in the 3-hp to 7. Pune.

  .Introduction to ³Economic Value Added´  Economic Value Added (EVA). EVA is the key to creating corporate wealth. the Fortune magazine has called it as ³today¶s hottest financial idea and getting hotter´. originally proposed by the firm of consultants named. EVA is a measurement tool designed to strengthen companies¶ return on capital investments. Stern Stewart & Co.

EVA is a measure that enables managers to see whether they are earning an adequate return .    .Continued«  EVA is essentially the surplus left after making an appropriate charge for the capital employed in the Business. EVA is quite popular in measuring performance because it has some powerful impacts on organizational behavior. Any profit earned over and above cost of capital is Economic Value added or excess of profit of a firm after charging cost of capital.

Components of EVA    Net Operating Profit After Tax (NOPAT) : NOPAT = (Profit Before Interest And Tax) (1 ± Tax Rate) Cost of Capital: Capital Employed: The formula of EVA is: EVA = NOPAT ± Cost of Capital * Capital .

00 15.49 *Interest post tax Less: Profit on sale of investments Less: Profit on sale of undertakings Net Profit after depreciation& taxes but before interest cost (NOPAT) 1055.87 24.94 2004-05 1738.95 11.15 771.09 28.90 33.92 190.Analysis & Findings  Calculation of Net Operating Profit After Tax (NOPAT) (Rs in Mil) Particulars Profit after tax (PAT) 2006-07 1784.58 617.82 2005-06 2005.38 1133.29 1588.65 974.2 2003-04 756.49 .

49 617.82 1055.Chart Showing growth of NOPAT 1600 1400 1200 1000 800 600 400 200 0 1588.15 Net Profit after depreciation& taxes but before interest cost (NOPAT) 2006-07 2005-06 2004-05 2003-04 .58 771.

48 .75 * Average Debt 770.18 5935.74 4317.11 363.19 2005-04 3795.73 Average Capital Employed 8663.12 4119.26 586.92 2006-05 5348.93 324.63 2003-04 3953.Calculation of Average Capital Employed Particulars *Average Equity 2007-06 7892.

74 4317.12 4119.18 5935.48 Average Capital Employed 2007-06 2006-05 2005-04 2003-04 .Chart showing Growth of Capital Employed 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 8663.

70 5.24% 0.00% 7.53% 5.05% 12.63% 7.20% 5. Bonds b) *Shareholders expectation of optimum return.2 6.22 1.90% 0.50% 0.Calculations of cost of equity Particulars 2007-06 2006-05 Years 2005-04 2003-04 a) *Risk free return equivalent to yield on long term (10yr) Govt.05% 7.50% 15.08% 5.10% 6.24% 15. c) Market Risk Premium Difference (b-a) d) *Beta variant for company's risk vis -a vis market risk.50% 1.60% Cost of Capital (a+e) 14. e) Adjusted market risk premium for company (c*d) 8.10% .00% 12% 11% 7.28% 12.84 6.

49 .20% 24.54% 36.88% 4.81 770.75 6.69% 33.66% 4.59% 3.75% 28.33% 33.26% 15.Calculations of Cost of Debt Particulars Years 2007-06 2006-05 2005-04 2003-04 1.99% 3.*Average Debt c) Cost of Debt %(a/b) d) Tax rate e) Cost of Debt( Post Tax) (c x (1-d)) Cost of Debt 43.26 5.13 586.92 37.64% 35.51% 11.38 24.15 363.*Interest paid 1.65 17.11 5.94 324.93 6.

92 1137.28% 276.93 4.75% 28.63% 675.38 287.48 3795.98 329.Calculation of Weighted Average Cost of Capital and Economic Value Added Particulars WACC (Post tax) a) Equity Cost % A) Cost of Equity (Rs) b) Debt Cost % B) Cost of Debt (Rs) C) WACC (A + B) D) WACC % [C/(a+b)] E) EVA=NOPAT WACC [C] 2007-06 2006-05 2005-04 2003-04 7892.11 3.45 324.19 12.13 11.44 277.05% 1109.60 .50 493.70 6.26 3.20% 24.63 7.92 14.80 355.75 12.75 4.14% 450.51% 11.45 363.10% 478.87 586.40 770.32 3953.65 700.26% 15.95 13.89 11.03 5348.

Chart showing growth of EVA 500 450 400 350 300 250 200 150 100 50 0 450.87 355.45 277.6 E) EVA=NOPAT WACC [C] 2007-06 2006-05 2005-04 2003-04 .45 329.

During the year. this results in a higher average cost of capital of 13.87 Millions.82Millions. The EVA for the year was positive to the extent of Rs. 450.14%.05%. 1137.   . as against Cost of Capital of Rs. While cost of Equity is 14.Findings  There is a sharp increase in the WACC due to larger component of equity as compared to debt. As the average debt component is small.95 Millions. 1588. the Company generated NOPAT of Rs. the cost of Debt for KOEL is only 3.75%.

87 (in mil) compared to previous year 2004.60 (Rs in mil) in the year 2003-04 compared to its previous year 2003-02 which is because the increase in the NOPAT to 772 (Rs in Mil) of 2003-04 & with a lower cost of capital i. 2005 this is because of the increase in NOPAT  . In the year 2006-07 there is increase in EVA to Rs 450.e 12.Continued«  The EVA has increased to 227.10%.

Suggestions  If the company can improve it¶s EVA by increasing its NOPAT which could be increased by increase in sales and reducing the Cost of Capital . The Cost of Capital can be reduced by withdrawal of unproductive investment. The company can still increase its Economic Value Added (EVA) by reducing the Cost of Capital.    . EVA can also be used as a measurement tool for measuring the performance of management. Increase in EVA can attract FDI.

valuebasedmanagement.com http:/www. . by Prassana Chandra.EVA.Ghosh Company Magazines.com.BusinessFinanceMag.net http:/www.Bibliography          http:/www.N. D. Accounting Standards & Corporate Accounting Practices by T.evanomics. com http:/www. Financial Management. page 1-4.Kumar.com http:/www.P.S. Finance & Human Resource for Good Governance by Dr. journals & Company Websites. Stern Stewart & Co. Management of Cost. Capitalizing on EVA by Tad Leahy.

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