A Project Report On
EVALUATION OF CAPITAL
At
SOUTH CENTRAL RAILWAY (INDIAN RAILWAYS)
(Usin C!pit!" #$% etin Tec&ni'$es) S$()itte% in t&e p!rti!" *$"*i"")ent o* t&e re'$ire)ent o* +!ster o* #$siness A%)inistr!tion
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AC-NOWLED.E+ENT
I/ t&!n0 t&e )!n! e)ent o* So$t& Centr!" R!i"1!2/ *or i3in )e t&e opport$nit2 to $n%ert!0e )2 project 1or04 I con3e2 )2 sincere t&!n0s to ,,, *or &is 3!"$!("e $i%!nce !n% 0in% s$pport 1&i"e %oin in*or)!tion *or t&is project4 I 1is& to e5press )2 sincere t&!n0s *or t&e 3!"$!("e t&eir 3!"$!("e s$pport4 I t&!n0 )2 P!rents/ Frien%s *or enco$r! in in co)p"etion o* project report4 $i%!nce recei3e% *ro) ,,,,/ Pro*essor in co))erce !n% *!c$"t2 )e)(ers *or t&is project !n% !t&erin t&e necess!r2
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DECLARATION
I/ t&e $n%ersi ne% &ere (2 proc"!i) t&!t t&e project report entit"e% 6EVALUATION OF CAPITAL7 (Usin c!pit!" ($% etin Tec&ni'$es) 8 A st$%2 in So$t& Centr!" R!i"1!2s/ presente% &ere is en$ine !n% ori in!" 1or0 o* )ine s$()itte% in p!rti!" *$"*i"")ent *or t&e !1!r% o* +!ster De ree in #$siness A%)inistr!tion (2 ,,,/ H2%er!(!% !n% &!s not (een s$()itte% t&e s!)e to !n2 ot&er $ni3ersit24
P"!ce9 H2%er!(!% D!te9 (,,,,)
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CONTENTS
INTRODUCTION O#:ECTIVE OF STUDY +ETHODOLO.Y OF STUDY LI+ITATIONS OF STUDY NEED FOR THE STUDY OR.ANI;ATION PROFILE
CONCEPTUAL AND THEORETICAL FRA+E OF CAUSES OF
SIC-NESS
DATA ANALYSIS
CONCLUSIONS AND SU..ESTIONS
#I#LIO.RAPHY
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INTRODUCTION
5
CAPITAL #UD.ETIN.
The term Capital Budgeting refers to long term planning for proposed capital outlay and their financial. It includes raising long-term funds and their utilization. It may e defined as a firm!s formal process of ac"uisition and in#estment of capital. Capital udgeting may also e defined as $The decision ma%ing process y &hich a firm e#aluates the purchase of ma'or fi(ed assets). It in#ol#es firm!s decision to in#est its current funds for addition* disposition* modification and replacement of fi(ed assets. It deals e(clusi#ely &ith in#estment proposals* &hich is essentially long-term pro'ects and is concerned &ith the allocation of firm!s scarce financial resources among the a#aila le mar%et opportunities. +ome of the e(amples of Capital ,(penditure are ? Cost of ac"uisition of permanent assets as land and uildings. ? Cost of addition* e(pansion* impro#ement or alteration in the fi(ed assets. ? -./ pro'ect cost* etc.*
0
De*initions9
$Capital Budgeting is long term planning for ma%ing and financing proposed capital outlays). T.12-34-,,3
$Capital udgeting is concerned &ith allocation of the firm!s scarce financial resources among the a#aila le mar%et opportunities. The consideration of in#estment opportunities in#ol#es the comparison of the e(pected future streams of earnings from a pro'ect &ith immediate and su se"uent streams of e(penditure for it). In any gro&ing concern* capital udgeting is more or less a continuous process and it is carried out y different functional areas of
management such as production* mar%eting* engineering* financial management etc. all the rele#ant functional departments play a crucial role in the capital udgeting decision are considered. The role of a finance manager in the capital udgeting asically lies in the process of critically and in-depth analysis and e#aluation of #arious alternati#e proposals* and then to select one out of them. 5s already stated* the asic o 'ecti#es of financial management is to ma(imize the &ealth of the share holders* therefore the o 'ecti#es of capital udgeting is to select those long term in#estment pro'ects that are e(pected to ma%e ma(imum contri ution to the &ealth of the shareholders in the long run.
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O#:ECTIVES OF THE STUDY
? To study the rele#ance of capital udgeting in e#aluating the pro'ect in a go#ernment organization. ? To study the techni"ue of capital udgeting for decisionma%ing. ? To understand an item &ise study of the organization financial performance.
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+ETHODOLO.Y
The information for this report has een collected through the 8rimary and secondary sources.
Pri)!r2 so$rces
? The data is collected through the o ser#ation in the organization and inter#ie& &ith officials. ? By as%ing "uestion &ith the accounts and other persons in the financial department.9oral "uestioning:
Secon%!r2 so$rces
These secondary data is e(isting data &hich is already een collected y 2thers* for that the sources are financial 'ournals* annual reports of the SOUTH CENTRAL RAILWAY* -5I;<5= &e site* and other 8u lications of -5I;<5=
>
LI+ITATION OF THE STUDY
? ;ac% of time is another limiting factor* ie.* the schedule period of 0 &ee%s are not sufficient to ma%e the study independently regarding Capital Budgeting in +. C. -5I;<5=+ ? The usy schedule of the officials in the +.C.-5I;<5=+ is another limiting factor. ? /ue to the usy schedule officials restricted me to collect the complete information a out organization. ? 3on-a#aila ility of confidential financial data. ? The study is conducted in a short period* &hich &as not detailed in all aspects.
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NEED FOR THE STUDY
? The 8ro'ect study is underta%en to analyze and understand the Capital Budgeting process in +outh Central -ail&ay* &hich gi#es main e(posure to practical implication of theory %no&ledge. ? To %no& a out the organization!s operation of using #arious Capital udgeting techni"ues. ? To %no& ho& the organization gets funds from #arious resources.
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HISTORY OF RAILWAY9
<=t& Apri"/ <>?@AAAA44 T&e #e innin
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The first rail&ay on Indian su -continent ran o#er a stretch of 21 miles from Bom ay to Thane. The idea of a rail&ay to connect Bom ay &ith Thane* @alyan and &ith the Thal and Bhore 4hats inclines first occurred to Ar. 4eorge Clar%* the chief engineer of the Bom ay 4o#ernment* during a #isit to Bhandup in 1743. The formal inauguration ceremony &as performed on 10th 5pril 1753B <hen 14 rail&ay carriage carrying a out 4?? guests left Bori Bunder at 3C3? pm $amidst the loud applause of a #ast multitude and to the salute of 21 guns). The first passenger train steamed out of 1o&rah station destined for 1oogly a distance of 24 miles* on 15th 5ugust* opened to pu lic traffic* inaugurating the eginning of rail&ay transport on the ,astern side of the su -continent. In south the first line &as opened on 1st 'uly* 1750 y the Aadras -ail&ay company. It ran et&een #eyasarpandy and <ala'ah road 95rcot:* a
distance of 03 miles. In the north a length of 11> miles of line &as laid from 5llaha ad to @anpur on 3rd march 1>5>. The first section from 1athras -oad to Aathura Cantonment &as opened to traffic on 1>th 2cto er* 1765.
INDIAN RAILWAYS
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I3/I53 -5I;<5=+* the premier transport organization of the country is the largest rail net&or% in 5sia and the &orld!s second largest under one management
Indian -ail&ays runs around 11*??? trains e#eryday* of &hich 6*??? are passenger trains
Indian -ail&ays is a multi-gauge* multi-traction system co#ering the follo&ingC
Trac%
Broad
Aeter 4auge 91??? mm:
3arro& 4auge 9602D01? mm:
Total
@ilometers 4auge 91060 mm:
70*520
17*52>
3*051
1?7*6?0
,lectrified -oute
Total
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6500 -locomoti#e @ilometers 3?? yards
36*74? coaching #ehicles 23?? F 4ood 10*??1 03*?27 +heds
222*146Ereight <agons 6?? F -epairs +hops
0753+tations
1.54 million F &or% force
Indian -ail&ay is one of the iggest -ail road system in the <orld operated and maintained under single management. It is oth a
4o#ernment department as &ell as a commercial underta%ing e(pected to e run on commercial lines. 5s a 4o#ernment department* Indian -ail&ay is e(pected to meet the social o ligations y carrying the traffic at
su sidized rates and at the same time Indian -ail&ay is e(pected to achie#e profita ility to meet its -e#enue as &ell as capital re"uirements for its operations maintenance . e(pansion needs. The 3et&or% of Indian -ail&ay is spread o#er 03??? routes @m spread into a out 6??? stations ha#ing a staff formation of 14la%h employees. Indian -ail&ay carries an estimated passenger Traffic of 56?? millions of passengers in the year 2??5-?0. It carries a &ide range of commodities o#er the system to cater to need of industry* thus helping the ,conomic de#elopment of the country. Indian -ail&ay is e(pected to carry during 2??6-?7* 675 million tons freight Traffic ringing a out
earnings of -s.46??? crores and the o#erall 4ross earnings from
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passengers* and other coaching goods earnings are targeted to touch -s.61??? crores in the year 2??6-?7 The financial #ia ility of Indian -ail&ay is 'udged y its operating -atio-a ratio of total &or%ing e(penses di#ided y gross earnings and e(pressed as percentage. The operating ratio of Indian -ail&ay during 2??5-?0 9audited figures: stood at 73.2G . for 2??0.?6 the operating ratio is udgeted or targeted at 6>.0G.
TURNAROUND OF INDIAN RAILWAY Indian -ail&ays during last 4years had adopted ne& financial and mar%eting strategies its main emphasis &as increased #olumes* cutting the costs and impro#e the financial performance y etter utilization of
e(isting resources . assets. The significant feature appreciated ,conomies* trade . 4eneral pu lic &as that Indian -ail&ay did not increase the fares . freights o#er couple of years ut impro#ed it financial performance y ending up in surplus of -s.2? thousand crores during the year 2??0-2??6. +ome of the methods adopted elo& are as underC
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? Carry more loads in the e(isting &agons ? 5dopt different mar%eting strategies y in#iting pu lic and pri#ate partnership* 'oint #enture etc. ? By adopting e-tic%eting* leasing of space in pri#ate to pri#ate parties 2utsourcing of acti#ities li%e maintenance of stations* catering ser#ices earnings. ? ;easing of #acant land for commercial purpose. ? In#iting industry to pro#ide &agons at their cost. ? Increase in capacity y successi#e replacement of first class coaches into 5C II tier and 5C III tier. ? Introduction of Intercity e(press Trains and adding more coaches to e(isting trains. NATIONAL RAIL VI-AS YO:ANA 9 <ith a #ie& to complete strategically important 8ro'ects &ithin a stipulated period of time* a nonudgetary in#estment initiati#e for the de#elopment of -ail&ays has een launched. Hnder the scheme all the capacity ottlenec%s in the critical sections of the rail&ay net&or% &ill e remo#ed at an in#estment of -s.15* ??? crores o#er the ne(t fi#e years. These pro'ects &ould includeC that helped in reduced manpo&er cost and increase
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+trengthening of the golden Iuadrilateral to run more long-distance* mailDe(press and freight trains at a higher speed of 1?? %mph. +trengthening of rail connecti#ity to ports and de#elopment of multimodal corridors to hinterland. Construction of four mega ridges F t&o o#er -i#er 4anga* one o#er -i#er Brahmaputra* and one o#er -i#er @osi. 5ccelerated completion of those pro'ects nearing completion and other important pro'ects.
CAPITAL #UD.ETIN. ON INDIAN RAILWAYS
Capital Budgeting on Indian -ail&ay is popularly %no&n as 5nnual <or%s* -olling +toc% and Aachinery 8lan 8rogramme* to meet and udget for replacement* modernization and ac"uisition of ne& assets for Indian -ail&ays and to meet corporate o 'ecti#es of organization. The capital udgeting is done under a single demand for grant %no&n as
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De)!n% No4<=9B 5ssets* 5c"uisition* -eplacement and rene&als this udgeting starts &ell efore the actual udgeting process starts for re#enue e(penditure of Indian -ail&ays. The 5nnual ,(ercise of <or%s 8rogramme starts some &here in June-July of e#ery year to ta%e care of its needs of underta%ing different &or%s including -olling +toc% 9,ngines* <agons and carriages: and machinery plant progamme. The 5nnual <or%s 8rogamme is planned under different 8lan heads to facilitate 8lanning Commission and Einance Ainistry to understand the capital re"uirements of Indian -ail&ays for e(penditure. The plan heads are intended to group similar type of &or%s under the heading. /ifferent types of plans heads are operated li%e ne& lines /ou ling* 4auge Con#ersion* -ail&ay ,lectrification pro'ects* 8assenger 5menities* Bridges* Trac% rene&als etc.
THE SOURCES FINANCE FOR CAPITAL #UD.ETIN. CO+ES FRO+ THE FOLLOWIN. HEADS4
C!pit!"9 pro#ided y go#ernment of India popularly %no&n as udgetary support. -ail&ays are to pay regularly interest on this capital* &hich is %no&n as di#idend to 4o#ernment of India at the rate prescri ed -ail&ay con#ention committee from time to time the present rate is 0.5G per
1>
annum. The capital pro#ided y the 4o#ernment is of permanent* nature and non-repaya le. Internal resourcesC this comprise of the follo&ing generated from the re#enue and y the &ay of appropriations e#ery year. DRF (Depreci!tion Reser3e *$n%)9 /-E is catered to rene&als and replacement of assets. De3e"op)ent F$n% 9 These is to cater to the cost of &or%s to&ards passengers amenities* staff &elfare &or%s and safety &or%s. S4R4S4F9 +pecial -ail&ay safety fund started in 2??1-?2 to&ards the re"uirements of underta%ing the &or%s of safety natures F to &ipe out the arrears of replacement* rene&al of o#erage assets o#er a period 0years. The re"uirement of funds &as -s16??? crores pro#ided y the 4o#ernment of India around -s.12??? crores from 4o#ernment of India as a special grant and alance -s.5??? corers mo ilized through le#y of safety surcharge on passengers! tic%ets e#ery year. #orro1in s9 Indian -ail&ays Einance Aar%et Corporation 9I-EC: floats Indian -ail&ay Ta(-free onds at fi(ed rate of interest and mo ilizes resources for purchase of rolling stoc% and leasing the same to Indian -ail&ay on payment of annual lease charges for a period of 1?years.
2?
O4Y4W (OWN YOUR WA.ON SCHE+E) 9 8ri#ate parties li%e 3T8C etc. purchase &agons and o&n them for carrying their commodities o#er Indian -ail&ay. There are other types of 888 models li%e B2;T 9Built* 2perate* lease and transfer: 'oint #enture &ith state go#ernment multi model Trans models of su ur an traffics in metropolitan cities. The Capital Budgeting re"uirements are estimated for 2??6-?7 at -sC 31??? crores for Indian -ail&ays &ith follo&ing sources of finance.
REVIEW OF CAPITAL #UD.ETIN. DURIN. <CTH AND <<TH PLAN
The Kth fi#e-year plan 92??2 F ?6: for -ail&ays &as appro#ed y the planning commission for a total outlay of -s.0?* 0?? crores &ith an
21
o#erall udgetary support of -s.26*0?? crores. The demand for freight traffic in the terminal year had een estimated as 024million tons of re#enue earnings freight e"ui#alent to 3>0 illion tone @ms of transport output &ith an a#erage gro&th rate of 5G per annum. The passenger in the traffic terminal year of the Kth Ei#e year plan had een pro'ected as 5775million originating passengers* e"ui#alent to 025 illion passengers @ms* &ith an a#erage gro&th rate of 3.3G per annum.
PERFOR+ANCE DURIN.9 ,t& Fi3e 2e!r P"!n
The actual plan outlay of the 1?th plan is e(pected to e a o#e -s.72???crores. This includes a much higher le#el of internal generation of o#er -s.27???crores* mar%et arro&ings of a o#e -s.105??crores and
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gross udgetary support of a out -s.30>??crores including contri ution to special -ail&ay safety fund. The freight traffic pro'ections for the 1?th plan ha#e een surpassed in the 4th year of the plan period it self. /uring 2??5-?0* originating re#enue earnings freight traffic &as 007million tones &ith an a#erage lead of 001@ms corresponding to transport outlay of 441 illion net ton @ms. In 2??0-?6* the terminal year of the 1?th plan* 620million tons of originating re#enue earnings freight traffic &ith a a#erage lead of 00?@ms to a transport out put of 46> illion net tones @ms. It is li%ely to e achie#ed at is 10.3G a o#e the original pro'ection in the 1?th plan. The originating passengers pro'ections for the 1?th plan has een surpassed in the 4th year of the plan period during 2??5-?0* the passenger traffic &as 5770millions of originating passengers corresponding to 02? illion passengers %ms. In 2??0-?6 the terminal year of the 1?th plan* 04??million originating passengers corresponding to 073 illion passengers %ms. Is li%ely to e achie#ed &hich is 12.5G a o#e the original pro'ection in the 1?th plan.
,I FIVE YEAR PLAN
The year 2??6-?7 mar%s the onset of the 11th fi#e-year plan 92??612:. By the terminal year of the 11th plan the traffic on Indian -ail&ays is e(pected to gro& 11??million tons of originating freight loading and o#er
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73??million originating passengers. 5s capacity e(pansion in the -ail&ays has een identified as a thrust area for the 11th plan. I- aim* to uilt capacity to cater to this large gro&th in traffic and also pro#ide more efficient and cost effecti#e ser#ices oth in freight and passenger usiness. Capacity e(pansion &ould include construction of dedicated freight corridors and a much higher le#el of in#estments for ne& lines* gauge con#ersion and dou ling. Aodernization and technology up gradation to impro#e the efficiencies and reduce the unit cost of transport &ould e %ey o 'ecti#e. 8roduction capacity of rolling stoc% &ould also e considera ly augmented during the KI plan period.
A #rie* O3er Vie1 o* <Ct& !n% <<t& Fi3e Ye!r P"!n In%i!n R!i"1!24
8rocedure follo&ed for Capital Budgeting on Indian -ail&ays i.e*
24
1: 8reliminary <or%s 8rogramme proposal for all ma'or &or%s are proposed oth di#isional and zonal -ail&ay in Indian -ail&ay. 2: These 8rogrammes are e(amined y Einance Board of respecti#e Lonal -ail&ayD8roduction units later on the proposals are for&ard to -ail&ay Board together &ith Einance comments and 4eneral Aanager appraisal. 5t -ail&ay Board le#el the proposals for Capital Budgeting are e(amined y different directors of -ail&ay Board Miz* 5ccounts /irected* ,ngineering directed* Traffic directorate. 3: Aa'or proposals are e(amined y e(pended -ail&ay Board &ere in addition to mem ers of -ail&ay Board sector 9e(penditure: Ainistry of finance 4o#ernment of India 8lanning Commission official &ill also coopted. 5fter the 5ppraisal is communicated the &or%s &ill e included in final &or%s programme of -ail&ay* &hich is presented in -ail&ay Budget to parliament for appro#al in the form of demand for grants.
HONOURS AND AWARDS9
Indian -ail&ays achie#ed a num er of recognitions and a&ards in sports* tourism sector and for e(cellence in operational matters. In the Common <ealth 4ames in Aanchester* the Indian team!s record performance has
25
een mainly due to -ail&ay team!s e(cellence in sports. ,(cept one mem er the entire &omen!s 1oc%ey team &hich agged the gold medal elonged to -ail&ays. Aohd 5li Iamar of Indian -ail&ays has agged gold medal for o(ing and other participants from -ail&ays helped India &in medals in many a team e#ents. 5 num er of sportspersons from -ail&ays &ere conferred &ith the co#eted 5r'una 5&ards and other ma'or sports a&ards.
SOUTH CENTRAL RAILWAY
+outh Central -ail&ay has completed 4? years of ser#ice since 2 2cto er 1>00. In this short period* +C- played a significant role in supplementing the green re#olution and rapid industrial gro&th that ha#e ta%en place in
20
the +outhern 8eninsula
y effecti#ely meeting the gro&ing transport
re"uirements of the region. <ith the setting up of a num er of ne& Cement plants in this region* a steady increase in Coal production in the +ingareni Collieries* the agricultural re#olution in the 3agar'una +agar and +ri -am +agar 5yacut elts and the setting up of a steel plant at Misa%hapatnam* the transport potential in the region has gone up tremendously. It has een the constant endea#or of +C- to match the demand y underta%ing construction of 3e& ;ines* 4auge Con#ersion* /ou ling* ,lectrification* Computerisation* introduction of higher 5(le and high speed Trains and other traffic facility &or%s. In the process the +outh Central -ail&ay has uilt a mega* modern enterprise matching
international standards. In its great tas% of mass mo#ement of people and material +outh Central -ail&ay employs a &or%force of 1.?3 la%hs "ualified* trained personnel. Be it pro#iding ser#ice to the customer &ith efficiency and humility* or earning profits for the organization* the fraternity of +outh Central -ail&ay has pro#ed to e a model &or%force. +ystematic organization and a le leadership are 'ust the right ingredients that ha#e gone into uilding a progressi#e pu lic ser#ice organization li%e +outh Central -ail&ay.
CO+PARISON WITH OTHER STATES /etails of -oute @ilometers as on 31.?3.2??4
26
STATE
#ROADB +ETER .UA.E B .UA.E
TOTAL
An%&r! Pr!%es&
@D?E
?CD
ED?F
+AHARASHTRA =DF -ARNATA-A +ADHYA PRADESH TA+ILNADU TOTAL BB D EDCE FD<
EEE FF
<<<D FG@
DC4<> BB <CEE
DC4<> D ?DEG
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DIVISIONS IN ANDHRA PRADESH9
DIVISION
#ROAD.UA.E
+ETER.UA.E
TOTAL
<FDE SECUDERA#AD
BBB <FDE
>GC VI:AYAWADA
BBB
>GC
<CE= .UNTA-AL
@D@
<EFC
EE@ HYDERA#AD 2>
<F=
?=G
?G< .UNTUR
BB
<CCF
E?> NANDED
?EE
<CCF
EDCE TOTAL
<CEE
?DEG
I+PROVIN. FINANCIAL HEALTH9
The financial position of Indian -ail&ays has een slo&ly ut steadily impro#ing. +ome of the highlights of the financial performance during 2??1-?2 includeC impro#ed operating ratio from >7.7 per cent to >0.0 per cent* sa#ings in ordinary &or%ing e(penses of -s.1* 476 crore* /epreciation -eser#e Eund 9/-E: alance goes up from -s.67.?4 crore during Aarch last year to -s.032.>> crore during same time this year. -ail&ays ha#e esta lished a ne& milestone in incremental freight loading during July this year y carrying 5.6? million tones of goods. Ereight loading for the last financial year crossed the target and attained 4>2.31 million tones.
3?
NEW STEPS TOWARDS SAFETY AND SECURITY9
+afety of 13 million passengers that Indian -ail&ays ser#e e#ery day is of paramount importance to the system. 2#er the years* apart from the regular safety norms follo&ed* the net&or% has ta%en a num er of steps through inno#ati#e use of technology and stepped up training to its manpo&er to enhance safety standards. Constitution of -s.16* ??? crore non-lapsa le +pecial -ail&ay +afety Eund 9+-+E: to replace the arrears of aging assets of -ail&ays o#er the ne(t si( years has een a historical mo#e in this direction. 5 num er of distressed ridges* old trac%s*
signaling system and other safety enhancement de#ices &ill e replaced during this period. 5s far as udget allocation for safety is concerned* -s.1* 4?? crore &as allocated in the re#ised estimate for the year 2??1-?2 and -s.2* 21? crore for the year 2??2-2??3. ,(tensi#e field trials of the 5nti-Collision /e#ice 95C/:* indigenously de#eloped y @on%an
-ail&ay* is going on and once deployed across the Lonal -ail&ays* this inno#ati#e technology &ill help rail&ays reduce accidents due to collision et&een trains. +ecurity of rail&ay passengers is at present a shared responsi ility of the -ail&ay 8rotection Eorce 9-8E: and the 4o#ernment -eser#e 8olice 94-8:. ,fforts are on to amend the -ail&ay 5ct to gi#e more po&ers to the -8E in ensuring security of passengers on trains and &ithin -ail&ay premises. /eployment of &omen police Eorce has een
31
made
for
security
and
assistance
of
&omen
passengers .
C23C,8TH5; 53/ T1,-2TIC5; E-5A,<2-@ 2E
32
C58IT5; BH/4,TI34
FEATURE OF CAPITAL #UD.ETIN.9
The important features* &hich distinguish capital udgeting decision in other day-to day decision* are Capital udgeting decision in#ol#es the e(change of current funds for the enefit to e achie#ed in future. The future enefits are e(pected and are to e realized o#er a series of years. The funds are in#ested in non-fle(i le long-term funds. They ha#e a long term and significant effect on the profita ility of the concern. They in#ol#e huge funds. They are irre#ersi le decisions. They are strategic decision associated &ith high degree of ris%.
33
I+PORTANCE OF CAPITAL #UD.ETIN.9
The importance of capital udgeting can e understood from the fact that an unsound in#estment decision may pro#e to e(istence of the organization. The importance of capital udgeting arises mainly due to the follo&ingC <4 L!r e in3est)ent9 Capital udgeting decision* generally in#ol#es large in#estment of funds. But the funds a#aila le &ith the firm are scarce and the demand for funds e fatal to the #ery
34
for e(ceeds resources. 1ence* it is #ery important for a firm to plan and control its capital e(penditure. 2.Lon ter) co))it)ent o* *$n%s9 Capital e(penditure in#ol#es not only large amount of funds ut also funds for long-term or an permanent asis. The long-term commitment of funds increases the financial ris% in#ol#ed in the in#estment decision. @4Irre3ersi("e n!t$re9 The capital e(penditure decisions are of irre#ersi le nature. 2nce* the decision for ac"uiring a permanent asset is ta%en* it ecomes #ery difficult to impose of these assets &ithout incurring hea#y losses.
E4 Lon ter) e**ect on pro*it!(i"it29 Capital udgeting decision has a long term and significant effect on the profita ility of a concern. 3ot only the present earnings of the firm are affected y the in#estment in capital assets ut also the future gro&th and profita ility of the firm depends up to the in#estment decision ta%en today. Capital udgeting decision has utmost has importance to a#oid o#er or under in#estment in fi(ed assets. ?4 Di**erence o* in3est)ent %ecision9
35
The long-term in#estment decision are difficult to uncertainties of future and higher degree of ris%. =4 Notion!" I)port!nce9
e ta%en
ecause
In#estment decision though ta%en y indi#idual concern is of national importance ecause it determines employment* economic acti#ities and economic gro&th.
-INDS OF CAPITAL #UD.ETIN.9
,#ery capital udgeting decision is a specific decision in the situation* for a gi#en firm and &ith gi#en parameters and therefore* almost infinite num er of types or forms of capital udgeting decision may occur. ,#en if the same decision eing considered y the same firm at t&o different points of time* the decision considerations may change as a result of change in any of the #aria les. 1o&e#er* the different types of capital
30
udgeting decision underta%en from time to time y different firms can e classified on a num er of dimensions. +ome pro'ects affect other pro'ects of the firm is considering and analyzing. 5t the other e(treme* some proposals are pre-re"uisite for other pro'ects. The pro'ect may also e classified as re#enue generating or cost reducing pro'ects can categorized as follo&sC <4 Fro) t&e point o* 3ie1 o* *ir)Hs e5istenceC The capital udgeting decision may e ta%en y a ne&ly incorporated firm or y an already e(isting firm. Ne1 Fir)C 5 ne&ly incorporated firm may e re"uired to ta%e different decision such as selection of a plant to e installed* capacity utilization at initial stages* to set up or not simultaneously the ancillary unity etc. e
E5istin Fir)9 5 firm &hich already e(ists may e re"uired to ta%e #arious decisions from time to time meet the challenge of competition or changing en#ironment. These decisions may eC Rep"!ce)ents !n% +o%erniI!tion DecisionC This is a common type of a capital udgeting decision. 5ll types of plant and machineries e#entually re"uire replacement. If the e(isting plant is to e replaced ecause of the economic life of the plant is o#er* then the decisions may e %no&n as a replacement decision. 1o&e#er* if an e(isting plant is to e replaced
36
ecause it has ecome technologically outdated 9though the economic life may not e o#er: the decision any e %no&n as a modernization decision. In case of a replacement decision* the o 'ecti#e is to restore the same or higher capacity* &hereas in case of modernization decision* the o 'ecti#es is to increase the efficiency andDor cost reduction. In general* the replacement decision and the modernization decision are also %no&n as cost reduction decisions 9ii) E5p!nsionC +ome times* the firm may e interested in Increasing the Installed production capacity so as to increase the mar%et share .In such a case* the finance manager is re"uired to e#aluate the e(pansion program in terms of marginal costs and marginal enefits.
(i) Di3ersi*ic!tionC +ome times* the firm may e interested to di#ersify into ne& product lines* ne& mar%ets* production of spares parts etc. in such a case* the finance manager is re"uired to e#aluate not only the marginal cost and enefits* ut also the effect of di#ersification on the e(isting mar%et share and profita ility. Both the e(pansion and di#ersification decisions may e also e %no&n as re#enue increasing decisions.
37
The capital udgeting may also e classified from the point of #ie& of the decision situation as follo&sC In%epen%ent project Decision9 This is a fundamental decision in Capital Budgeting. It also called as accept Dre'ect criterion. If the pro'ect is accepted* the firm in#ests in it. In general all these proposals* &hich yield a rate of return greater than a
certain re"uired rate of return on cost of capital* are accepted and the rest are re'ected. By applying this criterion all independent pro'ects &ith one in such a &ay that the acceptance of one precludes the possi ility of acceptance of another. Hnder the accept-re'ect decision all independent e
pro'ects that satisfy the minimum in#estment criterion should implemented.
(ii) +$t$!""2 E5c"$si3e Projects Decision9 Autually ,(clusi#e pro'ect are those* &hich compete &ith other pro'ects in such a &ay that the acceptance of one &ill e(clude the acceptance of the other pro'ects. The alternati#ely are mutually e(clusi#e and only one may e chosen. +uppose a company is intending to uy ane& machine. There are three competing rands* each &ith a different initial in#estment adopting costs. The three machines represent mutually e(clusi#e
3>
alternati#es as only one of these can here that the mutually e(clusi#e
e selected. It may pro'ects decisions
e noted are not
independent of the accept-re'ect decisions. (iii) C!pit!" R!tionin Decision9 B In a situation &here the firm has unlimited funds all independent in#estment proposals yielding return greater than some pre-determined le#els are accepted. 1o&e#er this situation does not pre#ail in most of the usiness firms in actual practice. They ha#e a fi(ed capital udget. 5 large num er of in#estment proposals compete for these limited funds* the firm must therefore ration them. The firm allocates funds to pro'ects in a Aanner that it ma(imizes long run returnsB this rationing refers to a situation in &hich a firm has more acceptance in#estment than it can finance. It is concerned &ith the selection of a group of in#estment proposals accepta le. Hnder the accept-re'ect decision capital rationing employees ran%ing of the accepta le in#estment pro'ects. The pro'ect can e ran%ed on the asis of a predetermined criterion such as the rate of return. The pro'ect is ran%ed in the descending order of the rate of return. PRO#LE+S AND DIFFICULTIES IN CAPITAL #UD.ETIN.9 The pro lems in Capital udgeting decision may e as follo&sC
4?
F$t$re $ncert!int29 Capital Budgeting decision in#ol#es long-term commitments. 1o&e#er there is lot of uncertainty in the long term. Hncertainty may e &ith reference to cost of the pro'ect* future e(pected returns* future competition* legal pro#isions* political situation etc. Ti)e E"e)ent9 The implication of a Capital Budgeting decision are scattered o#er along period. The cost and enefit of a decision may occur at different points of time. The cost of pro'ect is incurred immediately. 1o&e#er the in#estment is reco#ered o#er a num er of years. The future enefits ha#e to e ad'usted to ma%e them compara le &ith the cost. ;onger the time period in#ol#ed* greater &ould e the uncertainty. Di**ic$"t2 in '$!nti*ic!tion o* i)p!ct9 The finance manager may face difficulties in measuring the cost and enefits of pro'ects in "uantitati#e terms. Eor e(ample* the ne& products proposed to e launched y a firm may result in increase or decrease in sales of other products already eing sold y the same firm. It is #ery difficult to ascertain the e(tent of impact as the sales of other products may also e influenced y factor other than the launch of the ne& products.
ASSU+PTION IN CAPITAL #UD.ETIN.9
The capital udgeting decision process is a multi-faceted and analytical process. 5 num er of assumptions are re"uired to e made. These
assumptions constitute a general set of condition &ithin &hich the
41
financial aspects of different proposals are to e e#aluated. +ome of these assumptions areC 1.Certainity <ith -espect To Cost 5nd BenefitsC it is #ery difficult to estimate the cost and enefits of a proposal eyond 2-3 years in future. 1o&e#er* for a capital udgeting decision* it is assumed that the estimate of cost and enefits are reasona ly accurate and certain. 2.8rofit Aoti#eC 5nother assumption is that the capital udgeting
decisions are ta%en &ith a primary moti#e of increasing the profit of the firm. 3o other moti#e or goal influences the decision of the finance manager. 3.3o Capital -ationing C The capital Budgeting decision in the present chapter assume that there is no scarcity of capital. It assumes that a proposal &ill e accepted or re'ected in the strength of its merits alone. The proposal &ill not e considered in com ination &ith other proposals to the ma(imum utilization of a#aila le funds.
CAPITAL #UD.ETIN. PROCESS
Capital udgeting is comple( process as it in#ol#es decision relating to the In#estment of current funds for the enefit for the enefit to e achie#ed in future and the future are al&ays uncertain. 1o&e#er* the follo&ing procedure may e adopted in the process of Capital Budgeting. I%enti*ic!tion o* in3est)ent propos!"s
42
The capital udgeting process egins &ith the identification of in#estment 8roposals. The proposal a out potential in#estment opportunities may originate either from top management or from any officer of the organization. The departmental head analysis #arious proposals in the light of the corporate strategies and su mits the suita le proposals to the capital e(penditure planning. Screenin propos!"s9 The e(penditure planning committee screens the #arious proposals recei#ed from different departments. The committee re#ie&s these proposals from #arious angles to ensure that these are in accordance &ith the corporate strategies* or selection criterion of the firm and also do not lead departmental im alances.
E3!"$!tion o* V!rio$s propos!"s9 The ne(t step in the capital udgeting process is to #arious proposals. The method* &hich may e used for this purpose such as* pay ac% period method* rate of return method* 3.8.M and I.-.- etc. Fi5in priorities9 5fter e#aluating #arious proposals* the unprofita le uneconomical proposal may e re'ected and it may not e possi le for the firm to in#est
43
immediately in all the accepta le proposals due to limitation of funds. Therefore* it essential to ran% the pro'ectDproposals after considering urgency* ris% and profita ility in#ol#ed in there.
FINAL APPROVAL AND PREPARATION OF CAPITAL E,PENDITURE #UD.ET9
8roposals meeting the e#aluation and other criteria are appro#ed to e included in the capital e(penditure udget. The e(penditure udget lays do&n the amount of estimated e(penditure to e incurred on fi(ed assets during the udget period.
44
I)p"e)entin propos!"s9 8reparation of a capital e(penditure udget and incorporation of a
particular 8roposal in the udget doesn!t itself authorize to go ahead &ith the implementation of the pro'ect. 5 re"uest for the authority to spend the amount should e made to the capital ,(penditure committee* &hich re#ie&s the profita ility of the pro'ect in the changed circumstances. -esponsi ilities should e assigned &hile implementing the pro'ect in order to a#oid unnecessary delays and cost o#erruns. 3et&or% techni"ues li%e 8,-T and C8A can e applied to control and monitor the implementation of the pro'ects.
Per*or)!nce Re3ie19 The last stage in the process of capital udgeting is the e#aluation of the performance of the pro'ect. The e#aluation is made y comparing actual and udget e(penditures and also y comparing actual anticipated returns. The unfa#ora le #ariances* if any should e loo%ed in to and the causes of the same e identified so that correcti#e action may e ta%en in future.
45
+ETHODS OR TECHNIJUES OF CAPITAL #UD.ETIN.9
There are many methods for the e#aluating the profita ility of in#estment proposals the #arious commodity used methods are TECHNIJUES OF CAPITAL #UD.ETIN.
40
Tr!%ition!" +et&o%s +et&o%s 1. 8ay Bac% 8eriod 2. 5ccounting -ate of -eturn
Ti)e A%j$ste%
1.3.8.M 2.I.-.3.8.I
Tr!%ition!" )et&o%s9 8ay ac% period method 98.B.8: 5ccounting -ate of -eturn Aethod 95.-.-: Ti)e !%j$ste% or %isco$nte% tec&ni'$e9 9I: 3et 8resent Malue method 93.8.M: 9II: Internal -ate of -eturn method 9I.-.-: 9III: 8rofita ility Inde( method 98.I:
PAY #AC- PERIOD +ETHOD
The pay ac% come times called as payout or pay off period method represents the period in &hich total in#estment in permanent assets pay ac% itself. This method is ased on the principle that e#ery capital
e(penditure pays itself ac% &ith in a certain period out of the additional earnings generated from the capital assets. Decision r$"e9
46
5 pro'ect is accepted if its pay ac% period is less than period specific decision rule. 5 pro'ect is accepted if its pay ac% period is less than the period specified y the management and #ice-#ersa. Initi!" C!s& O$t*"o1 P!2 #!c0 Perio% K BBBBBBBBBBBBBBBBBBBBBBBBBBBB Ann$!" C!s& In*"o1s ADVANTA.ES9 ? +imple to understand and easy to calculate. ? It sa#es in costB it re"uires lesser time and la our as compared to other methods of capital udgeting. ? In this method* as a pro'ect &ith a shorter pay ac% period is preferred to the one ha#ing a longer pay ac% period* it reduces the loss through o solescence. ? /ue to its short- time approach* this method is particularly suited to a firm &hich has shortage of cash or &hose li"uidity position is not good. DISADVANTA.ES9
47
? It does not ta%e into account the cash inflo&s earned after the pay ac% period and hence the true profita ility of the pro'ect cannot e correctly assessed. ? This method ignores the time #alue of the money and does not consider the magnitude and timing of cash inflo&s. ? It does not ta%e into account the cost of capital* &hich is #ery important in ma%ing sound in#estment decision. ? It is difficult to determine the minimum accepta le pay ac% period* &hich is su 'ecti#e decision. ? It treats each assets indi#idual in isolation &ith other assets* &hich is not feasi le in real practice.
ACCOUNTIN. RATE OF RETURN +ETHOD
This method ta%es into account the earnings from the in#estment o#er the &hole life. It is %no&n as a#erage rate of return method ecause under this method the concept of accounting profit 938 after ta( and depreciation: is used rather than cash inflo&s. 5ccording to this method* #arious pro'ects are ran%ed in order of the rate of earnings or rate of return. Decision r$"e9
4>
The pro'ect &ith higher rate of return is selected and #ice-#ersa. The return on in#estment method can e in se#eral &ays* as AVERA.E RATE OF RETURN +ETHOD9 Hnder this method a#erage profit after ta( and depreciation is calculated and then it is di#ided y the total capital out lay.
5#erage 5nnual profits 9after dep. . ta
5#erage rate of return N----------------------------------------- ----(1?? 3et In#estment
ADVANTA.ES9 ? It is #ery simple to understand and easy to calculate. ? It uses the entire earnings of a pro'ect in calculating rate of return and hence gi#es a true #ie& of profita ility. ? 5s this method is ased upon accounting profit* it can e readily calculated from the financial data. DISADVANTA.ES9
5?
? It ignores the time #alue of money. ? It does not ta%e in to account the cash flo&s* &hich are more important than the accounting profits. ? It ignores the period in &hich the profit are earned as a 2?G rate of return in 2 O years is considered to e etter than 17Grate of return in 12 years. ? This method cannot e applied to a situation &here in#estment in pro'ect is to e made in parts.
NET PRESENT VALUE +ETHOD
The 38M method is a modern method of e#aluating in#estment proposals. This method ta%es in to consideration the time #alue of money and attempts to calculate the return on in#estments y introducing time
element. The net present #alues of all inflo&s and outflo&s of cash during the entire life of the pro'ect is determined separately for each year y
51
discounting these flo&s &ith firms cost of capital or predetermined rate. The steps in this method are 1: /etermine an appropriate rate of interest %no&n as cut off rate. 2: Compute the present #alue of cash inflo&s at the a o#e F determined discount rate. 3: Compute the present #alue of cash inflo&s at the predetermined rate. 4: Calculate the 38M of the pro'ect y su tracting the present #alue of cash outflo&s. Decision r$"e 5ccept the pro'ect if the 38M of the pro'ects ? or positi#e that is present #alue of cash inflo&s should e e"ual to or greater than the present #alue of cash outflo&s.
ADVANTA.ES9 ? It recognizes the time #alue of money and is suita le to apply in a situation &ith uniform cash outflo&s and une#en cash inflo&s. ? It ta%es in to account the earnings o#er the entire life of the pro'ect and gi#es the true #ie& if the profita ility of the in#estment ? Ta%es in to consideration the o 'ecti#e of ma(imum profita ility.
52
DISADVANTA.ES9 ? Aore difficult to understand and operate. ? It may not gi#e good results &hile comparing pro'ects &ith une"ual in#estment of funds. ? It is not easy to determine an appropriate discount rate.
INTERNAL RATE OF RETURN +ETHOD
The internal rate of return method is also a modern techni"ue of capital udgeting that ta%es in to account the time #alue of money. It is also %no&n as time- ad'usted rate of return or trial and error yield method. Hnder this method the cash flo&s of a pro'ect are discounted at a suita le rate y hit and trial method* &hich e"uates the net present #alue so
53
calculated to the amount of the in#estment. The internal rate of return can e defined as $that rate of discount at &hich the present #alue of cash inflo&s is e"ual to the present #alue of cash outflo&. Decision R$"e9 5ccept the proposal ha#ing the higher rate of return and #ice #ersa. If I--P@* accept pro'ect. @Ncost of capital. If I--Q@* re'ect pro'ect. DETER+INATION OF IRR a: <hen annual cash flo&s are e"ual o#er the life of the asset. Initial 2utlay E5CT2- N -------------------------------- ( 1?? 5nnual Cash inflo& : <hen the annual cash flo&s are une"ual o#er the life of the assetC 8M of cash inflo&s at lo&er rate F 8M of cash out flo&s IRR K;-R ---------------------------------------------------------9hr-lr: 8M of cash inflo&s at lo&er rate - 8M of cash inflo&s at higher rate The steps are in#ol#ed here areS 1. 8repare the cash flo&s ta le using assumed discount rate to discount the net cash flo&s to the present #alue. 2. Eind out the 38M* . if the 38M is positi#e* apply higher rate of discount.
54
3. If the higher discount rate still gi#es a positi#e 38M increases the discount rate further. Hntil the 38M ecomes zero. 4. If the 38M is negati#e* at a higher rate* 38M lies et&een these t&o rates. ADVANTA.ES9 ? It ta%es into account* the time #alue of money and can e applied in situation &ith e#en and e#en cash flo&s. ? It considers the profita ility of the pro'ects for its entire economic life. ? The determination of cost of capital is not a pre-re"uisite for the use of this method. ? It pro#ide for uniform ran%ing of proposals due to the percentage rate of return. ? This method is also compati le &ith the o 'ecti#e of ma(imum profita ility.
DISADVANTA.ES9 ? It is difficult to understand and operate. ? The results of 38M and I-- methods may differ &hen the pro'ects under e#aluation differ in their size* life and timings of cash flo&s.
55
? This method is
ased on the assumption that the earnings are
rein#ested at the I-- for the remaining life of the pro'ect* &hich is not a 'ustified assumption4
PROFITA#ILITY INDE, +ETHOD OR #ENEFIT COST RATIO +ETHOD
It is also a time-ad'usted method of e#aluating the in#estment proposals. 8I also called enefit cost ratio or desira ility factor is the relationship et&een present #alue of cash inflo&s and the present #alues of cash outflo&s. Thus 8M of cash inflo&s 8rofita ility inde( N ----------------------------8M of cash outflo&s 38M 3et profita ility inde( N --------------------------Initial 2utlay ADVANTA.ES9 ? Hnli%e net present #alue* the profita ility inde( method is used to ran% the pro'ects e#en &hen the costs of the pro'ects differ significantly.
50
? It recognizes the time #alue of money and is suita le to applied in a situation &ith uniform cash outflo& and une#en cash inflo&s. ? It ta%es into account the earnings o#er the entire life of the pro'ect and gi#es the true #ie& of the profita ility of the in#estment. Ta%es into consideration the o 'ecti#es of ma(imum profita ility. /I+5/M53T54,+C? Aore difficult to understand and operate. ? It may not gi#e good results &hile comparing pro'ects &ith une"ual in#estment funds. ? It is not easy to determine and appropriate discount rate. ? It may not gi#e good results &hile comparing pro'ects &ith une"ual li#es as the pro'ects ha#ing higher 38M ut ha#e a longer life span may not e as desira le as a pro'ects ha#ing some &hat lesser 38M achie#ed in a much shorter span of life of the asset.
56
DATA ANALYSIS
INVEST+ENT EVALUATION CRITERIA
57
Three steps are in#ol#ed in the e#aluation of an in#estmentC ? ,stimation of Cash Elo&s. ? ,stimation of the re"uired rate of return. ? 5pplication of a decision rule for ma%ing the choice. The in#estment decision rules may e referred to as capital udgeting techni"ues or in#estment criteria. 5 sound appraisal techni"ue should e used to measure the economic &orth of the in#estment pro'ect. The essential property of a sound techni"ue is that it should ma(imize the shareholder!s &ealth. 5 num er of capital udgeting techni"ues are used in practice. They may e grouped as follo&sC 8ay ac% period 5#erage -ate of -eturn 95--: 3et 8resent Malue 938M: Internal -ate of -eturn 9I--: 8rofita ility Inde( 5ll these methods of capital udgeting techni"ues are e(plained in detail F elo&C
1. 85= B5C@ 8,-I2/C
5>
The 8ay Bac% 8eriod is one the most popular and most &idely recognized traditional method of e#aluating in#estment proposals. It is defined as the num er of years re"uired in a pro'ect. If the pro'ect generates constant annual cash inflo&s* the pay follo&ing formulaeC Initial In#estment 8ay Bac% 8eriod N -------------------------------5nnual Cash Elo& In case of une"ual cash inflo&s* the pay ac% period can e computed y calculating the cumulati#e cash inflo& and chec%ing &hether the #alues are reco#ered to the original outlay and ta%ing the remaining amount and apply the formulae i.e.* -e"uired CE5T 8B8 N ase year R---------------------------------------3e(t year CE5T ac% period can e computed y the
ACCEPTANCE RULEC
0?
Aany firms use the pay ac% period as accept or re'ect criterion as &ell as a method of ran%ing pro'ects. If the pay ac% period calculated for a pro'ect is less than the ma(imum or standard pay ac% period set y management* It &ould e accepted* if not* it &ould re'ected. 5s a ran%ing method* it gi#es highest ran%ing to the pro'ect* &hich as the shortest pay ac% period and lo&est ran%ing to pro'ect* &hich as highest pay ac% period PAY #AC- PERIOD +ETHOD IN RAILWAYS 8ay ac% period is of limited application as it can e employed in situation &here there is a strict limit to the in#estment efore pro'ect e(piry of the useful life of the pro'ect .a proposed in#estment in a pro'ect in a foreign country &here the political sta ility can e foreseen only for a limited num er of years* plant D machinery in#ol#ing processes or a Tsingle purpose! ne& line &here the %no&n reser#es of coal* iron ore etc.* are e(pected to e depletedD e(hausted after a specific num er of years. 8ay ac% period is not in #ogue on the Indian -ail&ays* there is no ar to the application of the 8ay Bac% 8eriod method to e#aluation of -ail&ay 8ro'ects in consultation &ith the E5 . C52
STATE+ENT SHOWIN. CALCULATION OF PAY #AC- PERIOD (Rs4 in crores) 01
YEAR < F @ E4 ?4 =4 D4 >4 G <C4 <<4 <F4 <@4 <E4 <?4 <=4 <D4 <>4 <G4 FC4 F<4 FF4 F@4 FE4 F?4
ROE ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E
INC ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E>
TA, C C C C C C C C C C FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4>
PAT =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F
DEP <DC4EC <DC4EC <DC4EC <DC4EC <DC4EC <DC4EC <DC4EC <DC4EC <DC4EC <DC4EC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC
CFAT F@?4?F F@?4?F F@?4?F F@?4?F F@?4?F F@?4?F F@?4?F F@?4?F F@?4?F F@?4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F
CCFAT F@?4?F ED<4CE DC=4?= GEF4C> <<DD4=C <E<@4<F <=E>4=E <>>E4<= F<<G4=> F@??4FC FE<<4DF FE=>4FE F?FE4D= F?><4F> F=@D4>C F=GE4@F FD?C4>E F>CD4@= F>=@4>> FGFC4EC FGD=4GF @C@@4EE @C>G4G= @<E=4E> @FC@4CC
Base =ear N >th =ear CE5T N2355.2
-e"uired CE5TN1?.32 for 3e(t year
02
213?-211>.07 8ay ac% 8eriod N> year R ------------------------ N>th year R .??436 yr.
235542?
InterpretationC 5s per pay ac% period* the pro'ect is accepted ecause to get the initial in#estment of 213? crores* it is ta%ing a time of >.??4 years. 2.5M,-54, -5T, 2E -,TH-3C The 5#erage -ate 2E -eturn 95--: is also %no&n as 5ccounting -ate of -eturn using accounting information* as re#ealed y financial statement* to measure the profita ility of an in#estment. The accounting rate of return is found out y di#iding the a#erage after ta( profit y the a#erage in#estment. The a#erage in#estment &ould e e"ual to half of the original in#estment* if it is depreciated constantly .The 5ccounting rate of return can e calculated y the follo&ing formula i.e.* 5nnual 5#erage 8rofit after Ta( 5.-.- N ----------------------------------------------K1?? 5nnual 5#erage in#estment
03
STATE+ENT SHOWIN. CALCULATION OF AVERA.E RATE OF RETURN
(Rs in crores) YEAR <4 F4 @4 E4 ?4 =4 D4 >4 G4 <C4 <<4 <F4 <@4 <E4 <?4 <=4 <D4 <>4 <G4 FC4 F<4 FF4 F@4 FE4 F?4 Tot!" ROE ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E INC ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> TA, C C C C C C C C C C FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> PAT =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F <F>=4CC
04
CALCULATION OF ARR9
5#erage 385T
5#erage In#estment
?<4EE K BBBBBBBBBB, <CC <C=?
N 1270D25
N 213?D2
N 51.44
N 1?05.
ARR
K E4>@ L
Interpret!tionC
Erom the point of 5-- method* pro'ect should e accepted* as its 5-- is less than the re"uired rate of return 94.73G Q 12G:.
05
+tatement sho&ing calculation of profita ility inde( 9-s in crores:
YR ROE INC TA, PAT DEP CFAT PVM <FL PV4 CFAT C4O PVOF COF
? 1 2 3 4 5 0 6 7 > 1? 11 12 13 14 15 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 ? ? ? ? ? ? ? ? ? ? 22.7 ? 22.7 ? 22.7 ? 22.7 ? 22.7 ? 05.1 2 05.1 2 05.1 2 05.1 2 05.1 2 05.1 2 05.1 2 05.1 2 05.1 2 05.1 2 42.3 2 42.3 2 42.3 2 42.3 2 42.3 2 16?.4 ? 16?.4 ? 16?.4 ? 16?.4 ? 16?.4 ? 16?.4 ? 16?.4 ? 16?.4 ? 16?.4 ? 16?.4 ? 14.2? 14.2? 14.2? 14.2? 14.2?
00
1.?? 235.5 2 235.5 2 235.5 2 235.5 2 235.5 2 235.5 2 235.5 2 235.5 2 235.5 2 235.5 2 50.52 50.52 50.52 50.52 50.52 ?.7> 3 ?.6> 6 ?.61 2 ?.03 0 ?.50 6 ?.5? 6 ?.45 2 ?.4? 4 ?.30 1 ?.32 2 ?.27 6 ?.25 6 ?.22 > ?.2? 5 ?.17 3 21?.32 176.61 106.0> 14>.6> 133.54 11>.41 1?0.40 >5.15 >5.?2 65.74 10.22 14.53 12.>4 11.5> 1?.34
420. ? 16?. 4 16?. 4 16?. 4 16?. 4 16?. 4 16?. 4 16?. 4 16?. 4 16?. 4 16?. 4 ? ? ? ? ?
420.?? 152.16 125.71 121.32 1?7.36 >0.02 70.3> 66.?2 07.74 01.51 54.76 ? ? ? ? ?
10 16 17 1> 2? 21 22 23 24
5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 14>1
5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 136
22.7 ? 22.7 ? 22.7 ? 22.7 ? 22.7 ? 22.7 ? 22.7 ? 22.7 ? 22.7 ? 342
42.3 2 42.3 2 42.3 2 42.3 2 42.3 2 42.3 2 42.3 2 42.3 2 42.3 2 1270
14.2? 14.2? 14.2? 14.2? 14.2? 14.2? 14.2? 14.2? 14.2? 1>16
50.52 50.52 50.52 50.52 50.52 50.52 50.52 50.52 50.52 32?3
?.10 3 ?.14 0 ?.13 ? ?.11 0 ?.1? 4 ?.?> 3 ?.?7 3 ?.?6 4 ?.?0 0
>.21 7.25 6.35 0.50 5.77 5.20 4.0> 4.17 3.63 14541.> >
? ? ? ? ? ? ? ? ?
? ? ? ? ? ? ? ? ? 1377.>2
8M of cash inflo&s 8rofita ility inde( N -----------------------------8M of cash outflo& 38M 3et profita ility inde( N --------------------Initial cash outflo&
Eorm the a o#e ta le calculated #alues are 8resent Malue of Cash inflo& N 1454.>>
8resent Malue of Cash outflo& N 1377.>2 1454.>>
06
8rofita ility inde(
N
-----------------1377.>2
N
1.?46
0.?6 3et profita ility inde( N ------------------1377.>2 N 3.3,T 8-,+,3T M5;H, The 3et present Malue 938M: method is the classic economic method of e#aluating the in#estment proposals. It is one of the discounted cash flo& techni"ues e(plicitly recognizing the time #alue of money. It correctly postulates that cash flo&s arising at different time periods differ in #alue and the compara le only &hen their e"ui#alent present #alues are found out. The follo&ing steps are in#ol#ed in the calculation of 38M. ? Cash flo&s of the in#estment pro'ect should e forecasted ased on realistic assumptions. ? 5ppropriate discount rate should e identified to discount the forecasted cash flo&. The appropriate discount rate is the firm!s opportunity cost of capital* &hich is e"ual to the re"uired rate of return* e(pected y in#estors on in#estment of e"ui#alent ris%. ? 8resent #alue of cash flo&s should e calculated using opportunity cost of capital as the discount rate.
07
?.?46
? 3et present #alue should e found out y su tracting present #alue of cash outflo& from present #alue of cash inflo&.
5cceptance criteriaC The pro'ect should e accepted if 38M is positi#e. it should e clear that the acceptance rule using 38M method is to accept the in#estment pro'ect if its net present rule #alue is positi#e 938M C5+1 2HTE;2<:. The positi#e net present #alue &ill result if the pro'ect generates cash inflo&s at rate higher than the opportunity cost of capital. 5 pro'ect may e accepted in 38M N ?.
Thus* the 38M acceptance rules areC ? 5ccept if 38M N ? ? -e'ect if 38M Q ? ? Ill-defined if 38MN ?. Initial in#estment 5nnual Cash Elo& ;ife of the pro'ect /CE rate of return 9say: -----sC 4* ??*??? -sC 1* ??* ??? -sC 1? years 21.4G
0>
=ear
Capital in the eginning of the year
3et +urplus in the year
8ayment of interest U21.41G
-eco#er y of capital 95:
Capital at the end of the year 90:
91:
92:
93:
94:
1 2 3 4 5 0 6 7 > 1?
4*??*??? 3*75*052 3*07*232 3*46*151 3*21*470 2*>?*320 2*52*4>4 2*?0*501 1*5?*6>2 73*?71
1*??*??? 1*??*??? 1*??*??? 1*??*??? 1*??*??? 1*??*??? 1*??*??? 1*??*??? 1*??*??? 1*??*???
75*052 75*57? 67*>1> 64*335 03*74? 02*107 54*?06 44*231 32*27> 16*6>?
14*347 16*42? 21*?71 25*005 31*10? 36*732 45*>33 55*60> 06*611 72*21?
3*75*052 3*07*232 3*46*151 3*21*470 2*>?*320 2*52*4>4 2*?0*501 1*5?*6>2 73*?71 761
3*>>*12>
INTERPRETATION9
The small margin of difference 9-s.761:is accounted y the error in
interpolation of the rate of the return. It &ill e seen that at the discount
6?
rate of 21.41G* the pro'ect has reco#ered the original cost in full 9col.5:* a part from paying off interest at the same rate
PROVISION OF I#S AT = LOCATIONSON VI:AYAWADABVISHA-APATNA+ SECT S4No P!rtic$"!rs Ye!r C!s& o$t*"o1 net C!s& *"o1 Fi $res in (CCCHs)
C!s& Tri!" r!te <DL < Ti)in 1or0s < <FE>> C @DE=E Ro""in stoc0 Sp!rBes In*"o1 F!ctor V!"$e
F!c
Initi!" e5pen%it$re
FCC=B CD FCCDB C>
C
<FE>>
<E=<<
C C C
@DE=E
<4<D
@DE=E
<
F Cost o* rep"!ce)ent #!""!st F<CF= E?CCC SOT FCFDB F> C C4C@D C
61
FC@FB @@ @ Ann$!" net s!3in s FC@=B @D < to @C <<<?C <<<?C
E?CCC
C4C<=G
D?G ?F>@E =EGG?
?4>FG E Resi%$!" 3!"$e FC@=B @D @C E?CC E?CC C4CCG E<
=?C@=
<FFC< Net 3!"$e
8MU;- - C2E There fore* I--N;-R----------------------------------------( -ate /ifference 8MU;--8MU105?30-52734 N16GR------------------------------------- ( 5 122?1R2>34 122?1 N 16GR------------------------------------- ( 5 15135 N 16G R ?.7?G N21.?3G InterpretationC
62
Therefore* I-- lies at 21.?3G. It is a point &here outflo& N inflo& 5nd I--P@* Therefore it is accepted.
CALCULATION OF VARIOUS INPUTS PROVISION OF IBS AT 6 LOCATION ON VIJAYAWADA- VISHAKAPATNAM SECTION
UP TOTAL 5#erage no. of goods trains detained Eor the path per day 3? 5#erage no. of goods trains detained 8er month for path >?? 5#erage detention per train 1? +a#ings in detention to trains >??? 5#erage detention per month 9in hrs: 15? Total num er of engines detained >?? 45? 45? 65 65 45?? 45?? 45? 45? 15 15 DOWN
63
SAVING ON ROLLING STOCK SAVING ON LOCOS ,ngine hours sa#ed per month 9in hrs: 15? N 65 65
,ngines hours sa#ed per year N >?? >?? 17?? cost of diesel electric engine hour9in rupees: N 612 612? 1424? +a#ing per annum 9-s in la%h: 127.10 23 <5423+ +a#ings on rolling stoc% 5#erage detention per train 9in minutes: N N N 1? 3? 1?? 5?? 60?4 21.66 10.3? 35.4> 5#erage 3o of trains detained per day 9in oth direction: 5#erage no of &agons per train 5nticipated sa#ings in detention per day 9in hrs: +a#ings in &agon days per year +a#ings in &agons incl. 8ro#ision for repair.maintainanaceU4.5G Cost of B2K3 9-upees in la%h: Considering 1?G of the cost of B2K3 <agon as sa#ings 3,T +5MI34+ 9-s la%hs: 23 ;2C2+ 23 <5423+ T2T5; +5MI34+ ;,++C 3G of Cost of the proposal for maintenance 3,T +5MI34+ considering only 65G of the net sa#ings as assessed
64
N
04.?7
04.?7
21.66 K 1?D1?? K 10.3?
127.10 35.4> 103.05 14.> 147.00 111.5?
C2+T Ci#il engineering ,arth &or% 8.&ay Ballast +tructure portion Bridge portion Temp. ,sta lishment +.T ,lectrical- Traction ,lectrical- 4eneral Total -,+I/H5; M5;H, 2E 5++,T+ Cost ;ife in =ears +ignal and Telecommunication Ballast 8ermanent &ay Tot!" 45???.?? ?.?? ?.?? 25 4? 0? 1?L 1?G 1?G Rs4
9-s in la%hs:
3?.?? 45?.?? 1>.52 4>>.52 9R$pees in PCCCHs: -esidual life -esidual Malue
E?CC.CC ?.?? ?.?? E?CC4CC
65
+2HT1 C,3T-5; -5I;<5= 8-I;IAI35-= <2-@+ 8-24-5AA, 2??6-?7* /,A53/ 3o.10 8;53 1,5/C T-5EEIC E5CI;ITI,+
60
Item 3o.
8articulars of &or%
5llocat- 5nticipated ion Cost
2utlay proposed for 2??6-?7
Balance
Justification for pro#ision of 0 IB+ et&een T2H-3L/ 9?>. 0> @A: BMA-5@89>.46 @A: 3-8--,4 9>.41 @A:* T1= F /M/ 9>.37 @A:* 53M-1MA 9>.11 @A: -,4-=;A 97.35 @A: 23 BL5-M+@8 +ection.
C58
4>>52.??
1???
47>52
B-,5@ H8 2E C2+T 9-s. In ???!s:
66
/epartment CIMI; + .T ,lec T-/ T2T5;
Total 3???.?? 45???.?? 1>52.?? ??.?? 4>>52.??
FINDIN.S
? It is estimated that a capital re"uirements of 2 la%hs of crores is re"uired to complete the thousands of included in e(isting pro'ects. pro'ects already
67
? 5ctual realization of rate of return pro'ected in at the time of pro'ect appraisal &ill depend on timely completion of pro'ect &ith out any time o#er run and cost o#er run.
? The financing of -ail&ays pro'ects is organized at Indian -ail&ay le#el unli%e 8u lic +ector Hnits D8ri#ate companies &ere in Ban% Einance in#ol#ed.
CONCLUSION
? The 38M method follo&ed on -ail&ays is satisfactory.
6>
? The I-- method &or%ed to e#aluate the -ail&ay pro'ects is ased on /iscounted Cash Elo& Techni"ue.
? In this method* the unit Cost <or%ed out y traffic costing department of -ail&ay is adopted. The unit costs are updated continuously i.e.* e#ery year after closure of Einancial 5ccounts of -ail&ays.
? In the t&o pro'ects selected for studying the methods of financial e#aluation of -ail&ays pro'ects it is seen the rate of return is estimated 16G to 22G.
#oo0s O A$t&ors
EI353CI5; A5354,A,3T 8-5+5335 C153/-5
=t& E%ition
7?
FINANCIAL +ANA.E+ENT
I4+4PANDEY
FINANCIAL MANAGEMENT EI353CI5; A5354,A,3T
@153 53/ J5I3 F.M.VANHORNE
We( Sites
S4 no4 C<
We( sites
1114so$t¢r!"r!i"1!2s4co)
CF
1114in%i!nr!i"1!2s4co)
C@
1114ir*c4co)
71
doc_495443859.doc
EVALUATION OF CAPITAL
At
SOUTH CENTRAL RAILWAY (INDIAN RAILWAYS)
(Usin C!pit!" #$% etin Tec&ni'$es) S$()itte% in t&e p!rti!" *$"*i"")ent o* t&e re'$ire)ent o* +!ster o* #$siness A%)inistr!tion
,,,,
1
AC-NOWLED.E+ENT
I/ t&!n0 t&e )!n! e)ent o* So$t& Centr!" R!i"1!2/ *or i3in )e t&e opport$nit2 to $n%ert!0e )2 project 1or04 I con3e2 )2 sincere t&!n0s to ,,, *or &is 3!"$!("e $i%!nce !n% 0in% s$pport 1&i"e %oin in*or)!tion *or t&is project4 I 1is& to e5press )2 sincere t&!n0s *or t&e 3!"$!("e t&eir 3!"$!("e s$pport4 I t&!n0 )2 P!rents/ Frien%s *or enco$r! in in co)p"etion o* project report4 $i%!nce recei3e% *ro) ,,,,/ Pro*essor in co))erce !n% *!c$"t2 )e)(ers *or t&is project !n% !t&erin t&e necess!r2
,,,,
2
DECLARATION
I/ t&e $n%ersi ne% &ere (2 proc"!i) t&!t t&e project report entit"e% 6EVALUATION OF CAPITAL7 (Usin c!pit!" ($% etin Tec&ni'$es) 8 A st$%2 in So$t& Centr!" R!i"1!2s/ presente% &ere is en$ine !n% ori in!" 1or0 o* )ine s$()itte% in p!rti!" *$"*i"")ent *or t&e !1!r% o* +!ster De ree in #$siness A%)inistr!tion (2 ,,,/ H2%er!(!% !n% &!s not (een s$()itte% t&e s!)e to !n2 ot&er $ni3ersit24
P"!ce9 H2%er!(!% D!te9 (,,,,)
3
CONTENTS
INTRODUCTION O#:ECTIVE OF STUDY +ETHODOLO.Y OF STUDY LI+ITATIONS OF STUDY NEED FOR THE STUDY OR.ANI;ATION PROFILE
CONCEPTUAL AND THEORETICAL FRA+E OF CAUSES OF
SIC-NESS
DATA ANALYSIS
CONCLUSIONS AND SU..ESTIONS
#I#LIO.RAPHY
4
INTRODUCTION
5
CAPITAL #UD.ETIN.
The term Capital Budgeting refers to long term planning for proposed capital outlay and their financial. It includes raising long-term funds and their utilization. It may e defined as a firm!s formal process of ac"uisition and in#estment of capital. Capital udgeting may also e defined as $The decision ma%ing process y &hich a firm e#aluates the purchase of ma'or fi(ed assets). It in#ol#es firm!s decision to in#est its current funds for addition* disposition* modification and replacement of fi(ed assets. It deals e(clusi#ely &ith in#estment proposals* &hich is essentially long-term pro'ects and is concerned &ith the allocation of firm!s scarce financial resources among the a#aila le mar%et opportunities. +ome of the e(amples of Capital ,(penditure are ? Cost of ac"uisition of permanent assets as land and uildings. ? Cost of addition* e(pansion* impro#ement or alteration in the fi(ed assets. ? -./ pro'ect cost* etc.*
0
De*initions9
$Capital Budgeting is long term planning for ma%ing and financing proposed capital outlays). T.12-34-,,3
$Capital udgeting is concerned &ith allocation of the firm!s scarce financial resources among the a#aila le mar%et opportunities. The consideration of in#estment opportunities in#ol#es the comparison of the e(pected future streams of earnings from a pro'ect &ith immediate and su se"uent streams of e(penditure for it). In any gro&ing concern* capital udgeting is more or less a continuous process and it is carried out y different functional areas of
management such as production* mar%eting* engineering* financial management etc. all the rele#ant functional departments play a crucial role in the capital udgeting decision are considered. The role of a finance manager in the capital udgeting asically lies in the process of critically and in-depth analysis and e#aluation of #arious alternati#e proposals* and then to select one out of them. 5s already stated* the asic o 'ecti#es of financial management is to ma(imize the &ealth of the share holders* therefore the o 'ecti#es of capital udgeting is to select those long term in#estment pro'ects that are e(pected to ma%e ma(imum contri ution to the &ealth of the shareholders in the long run.
6
O#:ECTIVES OF THE STUDY
? To study the rele#ance of capital udgeting in e#aluating the pro'ect in a go#ernment organization. ? To study the techni"ue of capital udgeting for decisionma%ing. ? To understand an item &ise study of the organization financial performance.
7
+ETHODOLO.Y
The information for this report has een collected through the 8rimary and secondary sources.
Pri)!r2 so$rces
? The data is collected through the o ser#ation in the organization and inter#ie& &ith officials. ? By as%ing "uestion &ith the accounts and other persons in the financial department.9oral "uestioning:
Secon%!r2 so$rces
These secondary data is e(isting data &hich is already een collected y 2thers* for that the sources are financial 'ournals* annual reports of the SOUTH CENTRAL RAILWAY* -5I;<5= &e site* and other 8u lications of -5I;<5=
>
LI+ITATION OF THE STUDY
? ;ac% of time is another limiting factor* ie.* the schedule period of 0 &ee%s are not sufficient to ma%e the study independently regarding Capital Budgeting in +. C. -5I;<5=+ ? The usy schedule of the officials in the +.C.-5I;<5=+ is another limiting factor. ? /ue to the usy schedule officials restricted me to collect the complete information a out organization. ? 3on-a#aila ility of confidential financial data. ? The study is conducted in a short period* &hich &as not detailed in all aspects.
1?
NEED FOR THE STUDY
? The 8ro'ect study is underta%en to analyze and understand the Capital Budgeting process in +outh Central -ail&ay* &hich gi#es main e(posure to practical implication of theory %no&ledge. ? To %no& a out the organization!s operation of using #arious Capital udgeting techni"ues. ? To %no& ho& the organization gets funds from #arious resources.
11
HISTORY OF RAILWAY9
<=t& Apri"/ <>?@AAAA44 T&e #e innin
12
The first rail&ay on Indian su -continent ran o#er a stretch of 21 miles from Bom ay to Thane. The idea of a rail&ay to connect Bom ay &ith Thane* @alyan and &ith the Thal and Bhore 4hats inclines first occurred to Ar. 4eorge Clar%* the chief engineer of the Bom ay 4o#ernment* during a #isit to Bhandup in 1743. The formal inauguration ceremony &as performed on 10th 5pril 1753B <hen 14 rail&ay carriage carrying a out 4?? guests left Bori Bunder at 3C3? pm $amidst the loud applause of a #ast multitude and to the salute of 21 guns). The first passenger train steamed out of 1o&rah station destined for 1oogly a distance of 24 miles* on 15th 5ugust* opened to pu lic traffic* inaugurating the eginning of rail&ay transport on the ,astern side of the su -continent. In south the first line &as opened on 1st 'uly* 1750 y the Aadras -ail&ay company. It ran et&een #eyasarpandy and <ala'ah road 95rcot:* a
distance of 03 miles. In the north a length of 11> miles of line &as laid from 5llaha ad to @anpur on 3rd march 1>5>. The first section from 1athras -oad to Aathura Cantonment &as opened to traffic on 1>th 2cto er* 1765.
INDIAN RAILWAYS
13
I3/I53 -5I;<5=+* the premier transport organization of the country is the largest rail net&or% in 5sia and the &orld!s second largest under one management
Indian -ail&ays runs around 11*??? trains e#eryday* of &hich 6*??? are passenger trains
Indian -ail&ays is a multi-gauge* multi-traction system co#ering the follo&ingC
Trac%
Broad
Aeter 4auge 91??? mm:
3arro& 4auge 9602D01? mm:
Total
@ilometers 4auge 91060 mm:
70*520
17*52>
3*051
1?7*6?0
,lectrified -oute
Total
14
6500 -locomoti#e @ilometers 3?? yards
36*74? coaching #ehicles 23?? F 4ood 10*??1 03*?27 +heds
222*146Ereight <agons 6?? F -epairs +hops
0753+tations
1.54 million F &or% force
Indian -ail&ay is one of the iggest -ail road system in the <orld operated and maintained under single management. It is oth a
4o#ernment department as &ell as a commercial underta%ing e(pected to e run on commercial lines. 5s a 4o#ernment department* Indian -ail&ay is e(pected to meet the social o ligations y carrying the traffic at
su sidized rates and at the same time Indian -ail&ay is e(pected to achie#e profita ility to meet its -e#enue as &ell as capital re"uirements for its operations maintenance . e(pansion needs. The 3et&or% of Indian -ail&ay is spread o#er 03??? routes @m spread into a out 6??? stations ha#ing a staff formation of 14la%h employees. Indian -ail&ay carries an estimated passenger Traffic of 56?? millions of passengers in the year 2??5-?0. It carries a &ide range of commodities o#er the system to cater to need of industry* thus helping the ,conomic de#elopment of the country. Indian -ail&ay is e(pected to carry during 2??6-?7* 675 million tons freight Traffic ringing a out
earnings of -s.46??? crores and the o#erall 4ross earnings from
15
passengers* and other coaching goods earnings are targeted to touch -s.61??? crores in the year 2??6-?7 The financial #ia ility of Indian -ail&ay is 'udged y its operating -atio-a ratio of total &or%ing e(penses di#ided y gross earnings and e(pressed as percentage. The operating ratio of Indian -ail&ay during 2??5-?0 9audited figures: stood at 73.2G . for 2??0.?6 the operating ratio is udgeted or targeted at 6>.0G.
TURNAROUND OF INDIAN RAILWAY Indian -ail&ays during last 4years had adopted ne& financial and mar%eting strategies its main emphasis &as increased #olumes* cutting the costs and impro#e the financial performance y etter utilization of
e(isting resources . assets. The significant feature appreciated ,conomies* trade . 4eneral pu lic &as that Indian -ail&ay did not increase the fares . freights o#er couple of years ut impro#ed it financial performance y ending up in surplus of -s.2? thousand crores during the year 2??0-2??6. +ome of the methods adopted elo& are as underC
10
? Carry more loads in the e(isting &agons ? 5dopt different mar%eting strategies y in#iting pu lic and pri#ate partnership* 'oint #enture etc. ? By adopting e-tic%eting* leasing of space in pri#ate to pri#ate parties 2utsourcing of acti#ities li%e maintenance of stations* catering ser#ices earnings. ? ;easing of #acant land for commercial purpose. ? In#iting industry to pro#ide &agons at their cost. ? Increase in capacity y successi#e replacement of first class coaches into 5C II tier and 5C III tier. ? Introduction of Intercity e(press Trains and adding more coaches to e(isting trains. NATIONAL RAIL VI-AS YO:ANA 9 <ith a #ie& to complete strategically important 8ro'ects &ithin a stipulated period of time* a nonudgetary in#estment initiati#e for the de#elopment of -ail&ays has een launched. Hnder the scheme all the capacity ottlenec%s in the critical sections of the rail&ay net&or% &ill e remo#ed at an in#estment of -s.15* ??? crores o#er the ne(t fi#e years. These pro'ects &ould includeC that helped in reduced manpo&er cost and increase
16
+trengthening of the golden Iuadrilateral to run more long-distance* mailDe(press and freight trains at a higher speed of 1?? %mph. +trengthening of rail connecti#ity to ports and de#elopment of multimodal corridors to hinterland. Construction of four mega ridges F t&o o#er -i#er 4anga* one o#er -i#er Brahmaputra* and one o#er -i#er @osi. 5ccelerated completion of those pro'ects nearing completion and other important pro'ects.
CAPITAL #UD.ETIN. ON INDIAN RAILWAYS
Capital Budgeting on Indian -ail&ay is popularly %no&n as 5nnual <or%s* -olling +toc% and Aachinery 8lan 8rogramme* to meet and udget for replacement* modernization and ac"uisition of ne& assets for Indian -ail&ays and to meet corporate o 'ecti#es of organization. The capital udgeting is done under a single demand for grant %no&n as
17
De)!n% No4<=9B 5ssets* 5c"uisition* -eplacement and rene&als this udgeting starts &ell efore the actual udgeting process starts for re#enue e(penditure of Indian -ail&ays. The 5nnual ,(ercise of <or%s 8rogramme starts some &here in June-July of e#ery year to ta%e care of its needs of underta%ing different &or%s including -olling +toc% 9,ngines* <agons and carriages: and machinery plant progamme. The 5nnual <or%s 8rogamme is planned under different 8lan heads to facilitate 8lanning Commission and Einance Ainistry to understand the capital re"uirements of Indian -ail&ays for e(penditure. The plan heads are intended to group similar type of &or%s under the heading. /ifferent types of plans heads are operated li%e ne& lines /ou ling* 4auge Con#ersion* -ail&ay ,lectrification pro'ects* 8assenger 5menities* Bridges* Trac% rene&als etc.
THE SOURCES FINANCE FOR CAPITAL #UD.ETIN. CO+ES FRO+ THE FOLLOWIN. HEADS4
C!pit!"9 pro#ided y go#ernment of India popularly %no&n as udgetary support. -ail&ays are to pay regularly interest on this capital* &hich is %no&n as di#idend to 4o#ernment of India at the rate prescri ed -ail&ay con#ention committee from time to time the present rate is 0.5G per
1>
annum. The capital pro#ided y the 4o#ernment is of permanent* nature and non-repaya le. Internal resourcesC this comprise of the follo&ing generated from the re#enue and y the &ay of appropriations e#ery year. DRF (Depreci!tion Reser3e *$n%)9 /-E is catered to rene&als and replacement of assets. De3e"op)ent F$n% 9 These is to cater to the cost of &or%s to&ards passengers amenities* staff &elfare &or%s and safety &or%s. S4R4S4F9 +pecial -ail&ay safety fund started in 2??1-?2 to&ards the re"uirements of underta%ing the &or%s of safety natures F to &ipe out the arrears of replacement* rene&al of o#erage assets o#er a period 0years. The re"uirement of funds &as -s16??? crores pro#ided y the 4o#ernment of India around -s.12??? crores from 4o#ernment of India as a special grant and alance -s.5??? corers mo ilized through le#y of safety surcharge on passengers! tic%ets e#ery year. #orro1in s9 Indian -ail&ays Einance Aar%et Corporation 9I-EC: floats Indian -ail&ay Ta(-free onds at fi(ed rate of interest and mo ilizes resources for purchase of rolling stoc% and leasing the same to Indian -ail&ay on payment of annual lease charges for a period of 1?years.
2?
O4Y4W (OWN YOUR WA.ON SCHE+E) 9 8ri#ate parties li%e 3T8C etc. purchase &agons and o&n them for carrying their commodities o#er Indian -ail&ay. There are other types of 888 models li%e B2;T 9Built* 2perate* lease and transfer: 'oint #enture &ith state go#ernment multi model Trans models of su ur an traffics in metropolitan cities. The Capital Budgeting re"uirements are estimated for 2??6-?7 at -sC 31??? crores for Indian -ail&ays &ith follo&ing sources of finance.
REVIEW OF CAPITAL #UD.ETIN. DURIN. <CTH AND <<TH PLAN
The Kth fi#e-year plan 92??2 F ?6: for -ail&ays &as appro#ed y the planning commission for a total outlay of -s.0?* 0?? crores &ith an
21
o#erall udgetary support of -s.26*0?? crores. The demand for freight traffic in the terminal year had een estimated as 024million tons of re#enue earnings freight e"ui#alent to 3>0 illion tone @ms of transport output &ith an a#erage gro&th rate of 5G per annum. The passenger in the traffic terminal year of the Kth Ei#e year plan had een pro'ected as 5775million originating passengers* e"ui#alent to 025 illion passengers @ms* &ith an a#erage gro&th rate of 3.3G per annum.
PERFOR+ANCE DURIN.9 ,t& Fi3e 2e!r P"!n
The actual plan outlay of the 1?th plan is e(pected to e a o#e -s.72???crores. This includes a much higher le#el of internal generation of o#er -s.27???crores* mar%et arro&ings of a o#e -s.105??crores and
22
gross udgetary support of a out -s.30>??crores including contri ution to special -ail&ay safety fund. The freight traffic pro'ections for the 1?th plan ha#e een surpassed in the 4th year of the plan period it self. /uring 2??5-?0* originating re#enue earnings freight traffic &as 007million tones &ith an a#erage lead of 001@ms corresponding to transport outlay of 441 illion net ton @ms. In 2??0-?6* the terminal year of the 1?th plan* 620million tons of originating re#enue earnings freight traffic &ith a a#erage lead of 00?@ms to a transport out put of 46> illion net tones @ms. It is li%ely to e achie#ed at is 10.3G a o#e the original pro'ection in the 1?th plan. The originating passengers pro'ections for the 1?th plan has een surpassed in the 4th year of the plan period during 2??5-?0* the passenger traffic &as 5770millions of originating passengers corresponding to 02? illion passengers %ms. In 2??0-?6 the terminal year of the 1?th plan* 04??million originating passengers corresponding to 073 illion passengers %ms. Is li%ely to e achie#ed &hich is 12.5G a o#e the original pro'ection in the 1?th plan.
,I FIVE YEAR PLAN
The year 2??6-?7 mar%s the onset of the 11th fi#e-year plan 92??612:. By the terminal year of the 11th plan the traffic on Indian -ail&ays is e(pected to gro& 11??million tons of originating freight loading and o#er
23
73??million originating passengers. 5s capacity e(pansion in the -ail&ays has een identified as a thrust area for the 11th plan. I- aim* to uilt capacity to cater to this large gro&th in traffic and also pro#ide more efficient and cost effecti#e ser#ices oth in freight and passenger usiness. Capacity e(pansion &ould include construction of dedicated freight corridors and a much higher le#el of in#estments for ne& lines* gauge con#ersion and dou ling. Aodernization and technology up gradation to impro#e the efficiencies and reduce the unit cost of transport &ould e %ey o 'ecti#e. 8roduction capacity of rolling stoc% &ould also e considera ly augmented during the KI plan period.
A #rie* O3er Vie1 o* <Ct& !n% <<t& Fi3e Ye!r P"!n In%i!n R!i"1!24
8rocedure follo&ed for Capital Budgeting on Indian -ail&ays i.e*
24
1: 8reliminary <or%s 8rogramme proposal for all ma'or &or%s are proposed oth di#isional and zonal -ail&ay in Indian -ail&ay. 2: These 8rogrammes are e(amined y Einance Board of respecti#e Lonal -ail&ayD8roduction units later on the proposals are for&ard to -ail&ay Board together &ith Einance comments and 4eneral Aanager appraisal. 5t -ail&ay Board le#el the proposals for Capital Budgeting are e(amined y different directors of -ail&ay Board Miz* 5ccounts /irected* ,ngineering directed* Traffic directorate. 3: Aa'or proposals are e(amined y e(pended -ail&ay Board &ere in addition to mem ers of -ail&ay Board sector 9e(penditure: Ainistry of finance 4o#ernment of India 8lanning Commission official &ill also coopted. 5fter the 5ppraisal is communicated the &or%s &ill e included in final &or%s programme of -ail&ay* &hich is presented in -ail&ay Budget to parliament for appro#al in the form of demand for grants.
HONOURS AND AWARDS9
Indian -ail&ays achie#ed a num er of recognitions and a&ards in sports* tourism sector and for e(cellence in operational matters. In the Common <ealth 4ames in Aanchester* the Indian team!s record performance has
25
een mainly due to -ail&ay team!s e(cellence in sports. ,(cept one mem er the entire &omen!s 1oc%ey team &hich agged the gold medal elonged to -ail&ays. Aohd 5li Iamar of Indian -ail&ays has agged gold medal for o(ing and other participants from -ail&ays helped India &in medals in many a team e#ents. 5 num er of sportspersons from -ail&ays &ere conferred &ith the co#eted 5r'una 5&ards and other ma'or sports a&ards.
SOUTH CENTRAL RAILWAY
+outh Central -ail&ay has completed 4? years of ser#ice since 2 2cto er 1>00. In this short period* +C- played a significant role in supplementing the green re#olution and rapid industrial gro&th that ha#e ta%en place in
20
the +outhern 8eninsula
y effecti#ely meeting the gro&ing transport
re"uirements of the region. <ith the setting up of a num er of ne& Cement plants in this region* a steady increase in Coal production in the +ingareni Collieries* the agricultural re#olution in the 3agar'una +agar and +ri -am +agar 5yacut elts and the setting up of a steel plant at Misa%hapatnam* the transport potential in the region has gone up tremendously. It has een the constant endea#or of +C- to match the demand y underta%ing construction of 3e& ;ines* 4auge Con#ersion* /ou ling* ,lectrification* Computerisation* introduction of higher 5(le and high speed Trains and other traffic facility &or%s. In the process the +outh Central -ail&ay has uilt a mega* modern enterprise matching
international standards. In its great tas% of mass mo#ement of people and material +outh Central -ail&ay employs a &or%force of 1.?3 la%hs "ualified* trained personnel. Be it pro#iding ser#ice to the customer &ith efficiency and humility* or earning profits for the organization* the fraternity of +outh Central -ail&ay has pro#ed to e a model &or%force. +ystematic organization and a le leadership are 'ust the right ingredients that ha#e gone into uilding a progressi#e pu lic ser#ice organization li%e +outh Central -ail&ay.
CO+PARISON WITH OTHER STATES /etails of -oute @ilometers as on 31.?3.2??4
26
STATE
#ROADB +ETER .UA.E B .UA.E
TOTAL
An%&r! Pr!%es&
@D?E
?CD
ED?F
+AHARASHTRA =DF -ARNATA-A +ADHYA PRADESH TA+ILNADU TOTAL BB D EDCE FD<
EEE FF
<<<D FG@
DC4<> BB <CEE
DC4<> D ?DEG
27
DIVISIONS IN ANDHRA PRADESH9
DIVISION
#ROAD.UA.E
+ETER.UA.E
TOTAL
<FDE SECUDERA#AD
BBB <FDE
>GC VI:AYAWADA
BBB
>GC
<CE= .UNTA-AL
@D@
<EFC
EE@ HYDERA#AD 2>
<F=
?=G
?G< .UNTUR
BB
<CCF
E?> NANDED
?EE
<CCF
EDCE TOTAL
<CEE
?DEG
I+PROVIN. FINANCIAL HEALTH9
The financial position of Indian -ail&ays has een slo&ly ut steadily impro#ing. +ome of the highlights of the financial performance during 2??1-?2 includeC impro#ed operating ratio from >7.7 per cent to >0.0 per cent* sa#ings in ordinary &or%ing e(penses of -s.1* 476 crore* /epreciation -eser#e Eund 9/-E: alance goes up from -s.67.?4 crore during Aarch last year to -s.032.>> crore during same time this year. -ail&ays ha#e esta lished a ne& milestone in incremental freight loading during July this year y carrying 5.6? million tones of goods. Ereight loading for the last financial year crossed the target and attained 4>2.31 million tones.
3?
NEW STEPS TOWARDS SAFETY AND SECURITY9
+afety of 13 million passengers that Indian -ail&ays ser#e e#ery day is of paramount importance to the system. 2#er the years* apart from the regular safety norms follo&ed* the net&or% has ta%en a num er of steps through inno#ati#e use of technology and stepped up training to its manpo&er to enhance safety standards. Constitution of -s.16* ??? crore non-lapsa le +pecial -ail&ay +afety Eund 9+-+E: to replace the arrears of aging assets of -ail&ays o#er the ne(t si( years has een a historical mo#e in this direction. 5 num er of distressed ridges* old trac%s*
signaling system and other safety enhancement de#ices &ill e replaced during this period. 5s far as udget allocation for safety is concerned* -s.1* 4?? crore &as allocated in the re#ised estimate for the year 2??1-?2 and -s.2* 21? crore for the year 2??2-2??3. ,(tensi#e field trials of the 5nti-Collision /e#ice 95C/:* indigenously de#eloped y @on%an
-ail&ay* is going on and once deployed across the Lonal -ail&ays* this inno#ati#e technology &ill help rail&ays reduce accidents due to collision et&een trains. +ecurity of rail&ay passengers is at present a shared responsi ility of the -ail&ay 8rotection Eorce 9-8E: and the 4o#ernment -eser#e 8olice 94-8:. ,fforts are on to amend the -ail&ay 5ct to gi#e more po&ers to the -8E in ensuring security of passengers on trains and &ithin -ail&ay premises. /eployment of &omen police Eorce has een
31
made
for
security
and
assistance
of
&omen
passengers .
C23C,8TH5; 53/ T1,-2TIC5; E-5A,<2-@ 2E
32
C58IT5; BH/4,TI34
FEATURE OF CAPITAL #UD.ETIN.9
The important features* &hich distinguish capital udgeting decision in other day-to day decision* are Capital udgeting decision in#ol#es the e(change of current funds for the enefit to e achie#ed in future. The future enefits are e(pected and are to e realized o#er a series of years. The funds are in#ested in non-fle(i le long-term funds. They ha#e a long term and significant effect on the profita ility of the concern. They in#ol#e huge funds. They are irre#ersi le decisions. They are strategic decision associated &ith high degree of ris%.
33
I+PORTANCE OF CAPITAL #UD.ETIN.9
The importance of capital udgeting can e understood from the fact that an unsound in#estment decision may pro#e to e(istence of the organization. The importance of capital udgeting arises mainly due to the follo&ingC <4 L!r e in3est)ent9 Capital udgeting decision* generally in#ol#es large in#estment of funds. But the funds a#aila le &ith the firm are scarce and the demand for funds e fatal to the #ery
34
for e(ceeds resources. 1ence* it is #ery important for a firm to plan and control its capital e(penditure. 2.Lon ter) co))it)ent o* *$n%s9 Capital e(penditure in#ol#es not only large amount of funds ut also funds for long-term or an permanent asis. The long-term commitment of funds increases the financial ris% in#ol#ed in the in#estment decision. @4Irre3ersi("e n!t$re9 The capital e(penditure decisions are of irre#ersi le nature. 2nce* the decision for ac"uiring a permanent asset is ta%en* it ecomes #ery difficult to impose of these assets &ithout incurring hea#y losses.
E4 Lon ter) e**ect on pro*it!(i"it29 Capital udgeting decision has a long term and significant effect on the profita ility of a concern. 3ot only the present earnings of the firm are affected y the in#estment in capital assets ut also the future gro&th and profita ility of the firm depends up to the in#estment decision ta%en today. Capital udgeting decision has utmost has importance to a#oid o#er or under in#estment in fi(ed assets. ?4 Di**erence o* in3est)ent %ecision9
35
The long-term in#estment decision are difficult to uncertainties of future and higher degree of ris%. =4 Notion!" I)port!nce9
e ta%en
ecause
In#estment decision though ta%en y indi#idual concern is of national importance ecause it determines employment* economic acti#ities and economic gro&th.
-INDS OF CAPITAL #UD.ETIN.9
,#ery capital udgeting decision is a specific decision in the situation* for a gi#en firm and &ith gi#en parameters and therefore* almost infinite num er of types or forms of capital udgeting decision may occur. ,#en if the same decision eing considered y the same firm at t&o different points of time* the decision considerations may change as a result of change in any of the #aria les. 1o&e#er* the different types of capital
30
udgeting decision underta%en from time to time y different firms can e classified on a num er of dimensions. +ome pro'ects affect other pro'ects of the firm is considering and analyzing. 5t the other e(treme* some proposals are pre-re"uisite for other pro'ects. The pro'ect may also e classified as re#enue generating or cost reducing pro'ects can categorized as follo&sC <4 Fro) t&e point o* 3ie1 o* *ir)Hs e5istenceC The capital udgeting decision may e ta%en y a ne&ly incorporated firm or y an already e(isting firm. Ne1 Fir)C 5 ne&ly incorporated firm may e re"uired to ta%e different decision such as selection of a plant to e installed* capacity utilization at initial stages* to set up or not simultaneously the ancillary unity etc. e
E5istin Fir)9 5 firm &hich already e(ists may e re"uired to ta%e #arious decisions from time to time meet the challenge of competition or changing en#ironment. These decisions may eC Rep"!ce)ents !n% +o%erniI!tion DecisionC This is a common type of a capital udgeting decision. 5ll types of plant and machineries e#entually re"uire replacement. If the e(isting plant is to e replaced ecause of the economic life of the plant is o#er* then the decisions may e %no&n as a replacement decision. 1o&e#er* if an e(isting plant is to e replaced
36
ecause it has ecome technologically outdated 9though the economic life may not e o#er: the decision any e %no&n as a modernization decision. In case of a replacement decision* the o 'ecti#e is to restore the same or higher capacity* &hereas in case of modernization decision* the o 'ecti#es is to increase the efficiency andDor cost reduction. In general* the replacement decision and the modernization decision are also %no&n as cost reduction decisions 9ii) E5p!nsionC +ome times* the firm may e interested in Increasing the Installed production capacity so as to increase the mar%et share .In such a case* the finance manager is re"uired to e#aluate the e(pansion program in terms of marginal costs and marginal enefits.
(i) Di3ersi*ic!tionC +ome times* the firm may e interested to di#ersify into ne& product lines* ne& mar%ets* production of spares parts etc. in such a case* the finance manager is re"uired to e#aluate not only the marginal cost and enefits* ut also the effect of di#ersification on the e(isting mar%et share and profita ility. Both the e(pansion and di#ersification decisions may e also e %no&n as re#enue increasing decisions.
37
The capital udgeting may also e classified from the point of #ie& of the decision situation as follo&sC In%epen%ent project Decision9 This is a fundamental decision in Capital Budgeting. It also called as accept Dre'ect criterion. If the pro'ect is accepted* the firm in#ests in it. In general all these proposals* &hich yield a rate of return greater than a
certain re"uired rate of return on cost of capital* are accepted and the rest are re'ected. By applying this criterion all independent pro'ects &ith one in such a &ay that the acceptance of one precludes the possi ility of acceptance of another. Hnder the accept-re'ect decision all independent e
pro'ects that satisfy the minimum in#estment criterion should implemented.
(ii) +$t$!""2 E5c"$si3e Projects Decision9 Autually ,(clusi#e pro'ect are those* &hich compete &ith other pro'ects in such a &ay that the acceptance of one &ill e(clude the acceptance of the other pro'ects. The alternati#ely are mutually e(clusi#e and only one may e chosen. +uppose a company is intending to uy ane& machine. There are three competing rands* each &ith a different initial in#estment adopting costs. The three machines represent mutually e(clusi#e
3>
alternati#es as only one of these can here that the mutually e(clusi#e
e selected. It may pro'ects decisions
e noted are not
independent of the accept-re'ect decisions. (iii) C!pit!" R!tionin Decision9 B In a situation &here the firm has unlimited funds all independent in#estment proposals yielding return greater than some pre-determined le#els are accepted. 1o&e#er this situation does not pre#ail in most of the usiness firms in actual practice. They ha#e a fi(ed capital udget. 5 large num er of in#estment proposals compete for these limited funds* the firm must therefore ration them. The firm allocates funds to pro'ects in a Aanner that it ma(imizes long run returnsB this rationing refers to a situation in &hich a firm has more acceptance in#estment than it can finance. It is concerned &ith the selection of a group of in#estment proposals accepta le. Hnder the accept-re'ect decision capital rationing employees ran%ing of the accepta le in#estment pro'ects. The pro'ect can e ran%ed on the asis of a predetermined criterion such as the rate of return. The pro'ect is ran%ed in the descending order of the rate of return. PRO#LE+S AND DIFFICULTIES IN CAPITAL #UD.ETIN.9 The pro lems in Capital udgeting decision may e as follo&sC
4?
F$t$re $ncert!int29 Capital Budgeting decision in#ol#es long-term commitments. 1o&e#er there is lot of uncertainty in the long term. Hncertainty may e &ith reference to cost of the pro'ect* future e(pected returns* future competition* legal pro#isions* political situation etc. Ti)e E"e)ent9 The implication of a Capital Budgeting decision are scattered o#er along period. The cost and enefit of a decision may occur at different points of time. The cost of pro'ect is incurred immediately. 1o&e#er the in#estment is reco#ered o#er a num er of years. The future enefits ha#e to e ad'usted to ma%e them compara le &ith the cost. ;onger the time period in#ol#ed* greater &ould e the uncertainty. Di**ic$"t2 in '$!nti*ic!tion o* i)p!ct9 The finance manager may face difficulties in measuring the cost and enefits of pro'ects in "uantitati#e terms. Eor e(ample* the ne& products proposed to e launched y a firm may result in increase or decrease in sales of other products already eing sold y the same firm. It is #ery difficult to ascertain the e(tent of impact as the sales of other products may also e influenced y factor other than the launch of the ne& products.
ASSU+PTION IN CAPITAL #UD.ETIN.9
The capital udgeting decision process is a multi-faceted and analytical process. 5 num er of assumptions are re"uired to e made. These
assumptions constitute a general set of condition &ithin &hich the
41
financial aspects of different proposals are to e e#aluated. +ome of these assumptions areC 1.Certainity <ith -espect To Cost 5nd BenefitsC it is #ery difficult to estimate the cost and enefits of a proposal eyond 2-3 years in future. 1o&e#er* for a capital udgeting decision* it is assumed that the estimate of cost and enefits are reasona ly accurate and certain. 2.8rofit Aoti#eC 5nother assumption is that the capital udgeting
decisions are ta%en &ith a primary moti#e of increasing the profit of the firm. 3o other moti#e or goal influences the decision of the finance manager. 3.3o Capital -ationing C The capital Budgeting decision in the present chapter assume that there is no scarcity of capital. It assumes that a proposal &ill e accepted or re'ected in the strength of its merits alone. The proposal &ill not e considered in com ination &ith other proposals to the ma(imum utilization of a#aila le funds.
CAPITAL #UD.ETIN. PROCESS
Capital udgeting is comple( process as it in#ol#es decision relating to the In#estment of current funds for the enefit for the enefit to e achie#ed in future and the future are al&ays uncertain. 1o&e#er* the follo&ing procedure may e adopted in the process of Capital Budgeting. I%enti*ic!tion o* in3est)ent propos!"s
42
The capital udgeting process egins &ith the identification of in#estment 8roposals. The proposal a out potential in#estment opportunities may originate either from top management or from any officer of the organization. The departmental head analysis #arious proposals in the light of the corporate strategies and su mits the suita le proposals to the capital e(penditure planning. Screenin propos!"s9 The e(penditure planning committee screens the #arious proposals recei#ed from different departments. The committee re#ie&s these proposals from #arious angles to ensure that these are in accordance &ith the corporate strategies* or selection criterion of the firm and also do not lead departmental im alances.
E3!"$!tion o* V!rio$s propos!"s9 The ne(t step in the capital udgeting process is to #arious proposals. The method* &hich may e used for this purpose such as* pay ac% period method* rate of return method* 3.8.M and I.-.- etc. Fi5in priorities9 5fter e#aluating #arious proposals* the unprofita le uneconomical proposal may e re'ected and it may not e possi le for the firm to in#est
43
immediately in all the accepta le proposals due to limitation of funds. Therefore* it essential to ran% the pro'ectDproposals after considering urgency* ris% and profita ility in#ol#ed in there.
FINAL APPROVAL AND PREPARATION OF CAPITAL E,PENDITURE #UD.ET9
8roposals meeting the e#aluation and other criteria are appro#ed to e included in the capital e(penditure udget. The e(penditure udget lays do&n the amount of estimated e(penditure to e incurred on fi(ed assets during the udget period.
44
I)p"e)entin propos!"s9 8reparation of a capital e(penditure udget and incorporation of a
particular 8roposal in the udget doesn!t itself authorize to go ahead &ith the implementation of the pro'ect. 5 re"uest for the authority to spend the amount should e made to the capital ,(penditure committee* &hich re#ie&s the profita ility of the pro'ect in the changed circumstances. -esponsi ilities should e assigned &hile implementing the pro'ect in order to a#oid unnecessary delays and cost o#erruns. 3et&or% techni"ues li%e 8,-T and C8A can e applied to control and monitor the implementation of the pro'ects.
Per*or)!nce Re3ie19 The last stage in the process of capital udgeting is the e#aluation of the performance of the pro'ect. The e#aluation is made y comparing actual and udget e(penditures and also y comparing actual anticipated returns. The unfa#ora le #ariances* if any should e loo%ed in to and the causes of the same e identified so that correcti#e action may e ta%en in future.
45
+ETHODS OR TECHNIJUES OF CAPITAL #UD.ETIN.9
There are many methods for the e#aluating the profita ility of in#estment proposals the #arious commodity used methods are TECHNIJUES OF CAPITAL #UD.ETIN.
40
Tr!%ition!" +et&o%s +et&o%s 1. 8ay Bac% 8eriod 2. 5ccounting -ate of -eturn
Ti)e A%j$ste%
1.3.8.M 2.I.-.3.8.I
Tr!%ition!" )et&o%s9 8ay ac% period method 98.B.8: 5ccounting -ate of -eturn Aethod 95.-.-: Ti)e !%j$ste% or %isco$nte% tec&ni'$e9 9I: 3et 8resent Malue method 93.8.M: 9II: Internal -ate of -eturn method 9I.-.-: 9III: 8rofita ility Inde( method 98.I:
PAY #AC- PERIOD +ETHOD
The pay ac% come times called as payout or pay off period method represents the period in &hich total in#estment in permanent assets pay ac% itself. This method is ased on the principle that e#ery capital
e(penditure pays itself ac% &ith in a certain period out of the additional earnings generated from the capital assets. Decision r$"e9
46
5 pro'ect is accepted if its pay ac% period is less than period specific decision rule. 5 pro'ect is accepted if its pay ac% period is less than the period specified y the management and #ice-#ersa. Initi!" C!s& O$t*"o1 P!2 #!c0 Perio% K BBBBBBBBBBBBBBBBBBBBBBBBBBBB Ann$!" C!s& In*"o1s ADVANTA.ES9 ? +imple to understand and easy to calculate. ? It sa#es in costB it re"uires lesser time and la our as compared to other methods of capital udgeting. ? In this method* as a pro'ect &ith a shorter pay ac% period is preferred to the one ha#ing a longer pay ac% period* it reduces the loss through o solescence. ? /ue to its short- time approach* this method is particularly suited to a firm &hich has shortage of cash or &hose li"uidity position is not good. DISADVANTA.ES9
47
? It does not ta%e into account the cash inflo&s earned after the pay ac% period and hence the true profita ility of the pro'ect cannot e correctly assessed. ? This method ignores the time #alue of the money and does not consider the magnitude and timing of cash inflo&s. ? It does not ta%e into account the cost of capital* &hich is #ery important in ma%ing sound in#estment decision. ? It is difficult to determine the minimum accepta le pay ac% period* &hich is su 'ecti#e decision. ? It treats each assets indi#idual in isolation &ith other assets* &hich is not feasi le in real practice.
ACCOUNTIN. RATE OF RETURN +ETHOD
This method ta%es into account the earnings from the in#estment o#er the &hole life. It is %no&n as a#erage rate of return method ecause under this method the concept of accounting profit 938 after ta( and depreciation: is used rather than cash inflo&s. 5ccording to this method* #arious pro'ects are ran%ed in order of the rate of earnings or rate of return. Decision r$"e9
4>
The pro'ect &ith higher rate of return is selected and #ice-#ersa. The return on in#estment method can e in se#eral &ays* as AVERA.E RATE OF RETURN +ETHOD9 Hnder this method a#erage profit after ta( and depreciation is calculated and then it is di#ided y the total capital out lay.
5#erage 5nnual profits 9after dep. . ta
5#erage rate of return N----------------------------------------- ----(1?? 3et In#estmentADVANTA.ES9 ? It is #ery simple to understand and easy to calculate. ? It uses the entire earnings of a pro'ect in calculating rate of return and hence gi#es a true #ie& of profita ility. ? 5s this method is ased upon accounting profit* it can e readily calculated from the financial data. DISADVANTA.ES9
5?
? It ignores the time #alue of money. ? It does not ta%e in to account the cash flo&s* &hich are more important than the accounting profits. ? It ignores the period in &hich the profit are earned as a 2?G rate of return in 2 O years is considered to e etter than 17Grate of return in 12 years. ? This method cannot e applied to a situation &here in#estment in pro'ect is to e made in parts.
NET PRESENT VALUE +ETHOD
The 38M method is a modern method of e#aluating in#estment proposals. This method ta%es in to consideration the time #alue of money and attempts to calculate the return on in#estments y introducing time
element. The net present #alues of all inflo&s and outflo&s of cash during the entire life of the pro'ect is determined separately for each year y
51
discounting these flo&s &ith firms cost of capital or predetermined rate. The steps in this method are 1: /etermine an appropriate rate of interest %no&n as cut off rate. 2: Compute the present #alue of cash inflo&s at the a o#e F determined discount rate. 3: Compute the present #alue of cash inflo&s at the predetermined rate. 4: Calculate the 38M of the pro'ect y su tracting the present #alue of cash outflo&s. Decision r$"e 5ccept the pro'ect if the 38M of the pro'ects ? or positi#e that is present #alue of cash inflo&s should e e"ual to or greater than the present #alue of cash outflo&s.
ADVANTA.ES9 ? It recognizes the time #alue of money and is suita le to apply in a situation &ith uniform cash outflo&s and une#en cash inflo&s. ? It ta%es in to account the earnings o#er the entire life of the pro'ect and gi#es the true #ie& if the profita ility of the in#estment ? Ta%es in to consideration the o 'ecti#e of ma(imum profita ility.
52
DISADVANTA.ES9 ? Aore difficult to understand and operate. ? It may not gi#e good results &hile comparing pro'ects &ith une"ual in#estment of funds. ? It is not easy to determine an appropriate discount rate.
INTERNAL RATE OF RETURN +ETHOD
The internal rate of return method is also a modern techni"ue of capital udgeting that ta%es in to account the time #alue of money. It is also %no&n as time- ad'usted rate of return or trial and error yield method. Hnder this method the cash flo&s of a pro'ect are discounted at a suita le rate y hit and trial method* &hich e"uates the net present #alue so
53
calculated to the amount of the in#estment. The internal rate of return can e defined as $that rate of discount at &hich the present #alue of cash inflo&s is e"ual to the present #alue of cash outflo&. Decision R$"e9 5ccept the proposal ha#ing the higher rate of return and #ice #ersa. If I--P@* accept pro'ect. @Ncost of capital. If I--Q@* re'ect pro'ect. DETER+INATION OF IRR a: <hen annual cash flo&s are e"ual o#er the life of the asset. Initial 2utlay E5CT2- N -------------------------------- ( 1?? 5nnual Cash inflo& : <hen the annual cash flo&s are une"ual o#er the life of the assetC 8M of cash inflo&s at lo&er rate F 8M of cash out flo&s IRR K;-R ---------------------------------------------------------9hr-lr: 8M of cash inflo&s at lo&er rate - 8M of cash inflo&s at higher rate The steps are in#ol#ed here areS 1. 8repare the cash flo&s ta le using assumed discount rate to discount the net cash flo&s to the present #alue. 2. Eind out the 38M* . if the 38M is positi#e* apply higher rate of discount.
54
3. If the higher discount rate still gi#es a positi#e 38M increases the discount rate further. Hntil the 38M ecomes zero. 4. If the 38M is negati#e* at a higher rate* 38M lies et&een these t&o rates. ADVANTA.ES9 ? It ta%es into account* the time #alue of money and can e applied in situation &ith e#en and e#en cash flo&s. ? It considers the profita ility of the pro'ects for its entire economic life. ? The determination of cost of capital is not a pre-re"uisite for the use of this method. ? It pro#ide for uniform ran%ing of proposals due to the percentage rate of return. ? This method is also compati le &ith the o 'ecti#e of ma(imum profita ility.
DISADVANTA.ES9 ? It is difficult to understand and operate. ? The results of 38M and I-- methods may differ &hen the pro'ects under e#aluation differ in their size* life and timings of cash flo&s.
55
? This method is
ased on the assumption that the earnings are
rein#ested at the I-- for the remaining life of the pro'ect* &hich is not a 'ustified assumption4
PROFITA#ILITY INDE, +ETHOD OR #ENEFIT COST RATIO +ETHOD
It is also a time-ad'usted method of e#aluating the in#estment proposals. 8I also called enefit cost ratio or desira ility factor is the relationship et&een present #alue of cash inflo&s and the present #alues of cash outflo&s. Thus 8M of cash inflo&s 8rofita ility inde( N ----------------------------8M of cash outflo&s 38M 3et profita ility inde( N --------------------------Initial 2utlay ADVANTA.ES9 ? Hnli%e net present #alue* the profita ility inde( method is used to ran% the pro'ects e#en &hen the costs of the pro'ects differ significantly.
50
? It recognizes the time #alue of money and is suita le to applied in a situation &ith uniform cash outflo& and une#en cash inflo&s. ? It ta%es into account the earnings o#er the entire life of the pro'ect and gi#es the true #ie& of the profita ility of the in#estment. Ta%es into consideration the o 'ecti#es of ma(imum profita ility. /I+5/M53T54,+C? Aore difficult to understand and operate. ? It may not gi#e good results &hile comparing pro'ects &ith une"ual in#estment funds. ? It is not easy to determine and appropriate discount rate. ? It may not gi#e good results &hile comparing pro'ects &ith une"ual li#es as the pro'ects ha#ing higher 38M ut ha#e a longer life span may not e as desira le as a pro'ects ha#ing some &hat lesser 38M achie#ed in a much shorter span of life of the asset.
56
DATA ANALYSIS
INVEST+ENT EVALUATION CRITERIA
57
Three steps are in#ol#ed in the e#aluation of an in#estmentC ? ,stimation of Cash Elo&s. ? ,stimation of the re"uired rate of return. ? 5pplication of a decision rule for ma%ing the choice. The in#estment decision rules may e referred to as capital udgeting techni"ues or in#estment criteria. 5 sound appraisal techni"ue should e used to measure the economic &orth of the in#estment pro'ect. The essential property of a sound techni"ue is that it should ma(imize the shareholder!s &ealth. 5 num er of capital udgeting techni"ues are used in practice. They may e grouped as follo&sC 8ay ac% period 5#erage -ate of -eturn 95--: 3et 8resent Malue 938M: Internal -ate of -eturn 9I--: 8rofita ility Inde( 5ll these methods of capital udgeting techni"ues are e(plained in detail F elo&C
1. 85= B5C@ 8,-I2/C
5>
The 8ay Bac% 8eriod is one the most popular and most &idely recognized traditional method of e#aluating in#estment proposals. It is defined as the num er of years re"uired in a pro'ect. If the pro'ect generates constant annual cash inflo&s* the pay follo&ing formulaeC Initial In#estment 8ay Bac% 8eriod N -------------------------------5nnual Cash Elo& In case of une"ual cash inflo&s* the pay ac% period can e computed y calculating the cumulati#e cash inflo& and chec%ing &hether the #alues are reco#ered to the original outlay and ta%ing the remaining amount and apply the formulae i.e.* -e"uired CE5T 8B8 N ase year R---------------------------------------3e(t year CE5T ac% period can e computed y the
ACCEPTANCE RULEC
0?
Aany firms use the pay ac% period as accept or re'ect criterion as &ell as a method of ran%ing pro'ects. If the pay ac% period calculated for a pro'ect is less than the ma(imum or standard pay ac% period set y management* It &ould e accepted* if not* it &ould re'ected. 5s a ran%ing method* it gi#es highest ran%ing to the pro'ect* &hich as the shortest pay ac% period and lo&est ran%ing to pro'ect* &hich as highest pay ac% period PAY #AC- PERIOD +ETHOD IN RAILWAYS 8ay ac% period is of limited application as it can e employed in situation &here there is a strict limit to the in#estment efore pro'ect e(piry of the useful life of the pro'ect .a proposed in#estment in a pro'ect in a foreign country &here the political sta ility can e foreseen only for a limited num er of years* plant D machinery in#ol#ing processes or a Tsingle purpose! ne& line &here the %no&n reser#es of coal* iron ore etc.* are e(pected to e depletedD e(hausted after a specific num er of years. 8ay ac% period is not in #ogue on the Indian -ail&ays* there is no ar to the application of the 8ay Bac% 8eriod method to e#aluation of -ail&ay 8ro'ects in consultation &ith the E5 . C52
STATE+ENT SHOWIN. CALCULATION OF PAY #AC- PERIOD (Rs4 in crores) 01
YEAR < F @ E4 ?4 =4 D4 >4 G <C4 <<4 <F4 <@4 <E4 <?4 <=4 <D4 <>4 <G4 FC4 F<4 FF4 F@4 FE4 F?4
ROE ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E
INC ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E>
TA, C C C C C C C C C C FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4>
PAT =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F
DEP <DC4EC <DC4EC <DC4EC <DC4EC <DC4EC <DC4EC <DC4EC <DC4EC <DC4EC <DC4EC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC <E4FC
CFAT F@?4?F F@?4?F F@?4?F F@?4?F F@?4?F F@?4?F F@?4?F F@?4?F F@?4?F F@?4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F ?=4?F
CCFAT F@?4?F ED<4CE DC=4?= GEF4C> <<DD4=C <E<@4<F <=E>4=E <>>E4<= F<<G4=> F@??4FC FE<<4DF FE=>4FE F?FE4D= F?><4F> F=@D4>C F=GE4@F FD?C4>E F>CD4@= F>=@4>> FGFC4EC FGD=4GF @C@@4EE @C>G4G= @<E=4E> @FC@4CC
Base =ear N >th =ear CE5T N2355.2
-e"uired CE5TN1?.32 for 3e(t year
02
213?-211>.07 8ay ac% 8eriod N> year R ------------------------ N>th year R .??436 yr.
235542?
InterpretationC 5s per pay ac% period* the pro'ect is accepted ecause to get the initial in#estment of 213? crores* it is ta%ing a time of >.??4 years. 2.5M,-54, -5T, 2E -,TH-3C The 5#erage -ate 2E -eturn 95--: is also %no&n as 5ccounting -ate of -eturn using accounting information* as re#ealed y financial statement* to measure the profita ility of an in#estment. The accounting rate of return is found out y di#iding the a#erage after ta( profit y the a#erage in#estment. The a#erage in#estment &ould e e"ual to half of the original in#estment* if it is depreciated constantly .The 5ccounting rate of return can e calculated y the follo&ing formula i.e.* 5nnual 5#erage 8rofit after Ta( 5.-.- N ----------------------------------------------K1?? 5nnual 5#erage in#estment
03
STATE+ENT SHOWIN. CALCULATION OF AVERA.E RATE OF RETURN
(Rs in crores) YEAR <4 F4 @4 E4 ?4 =4 D4 >4 G4 <C4 <<4 <F4 <@4 <E4 <?4 <=4 <D4 <>4 <G4 FC4 F<4 FF4 F@4 FE4 F?4 Tot!" ROE ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E ?G4=E INC ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> ?4E> TA, C C C C C C C C C C FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> FF4> PAT =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F =?4<F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F EF4@F <F>=4CC
04
CALCULATION OF ARR9
5#erage 385T
5#erage In#estment
?<4EE K BBBBBBBBBB, <CC <C=?
N 1270D25
N 213?D2
N 51.44
N 1?05.
ARR
K E4>@ L
Interpret!tionC
Erom the point of 5-- method* pro'ect should e accepted* as its 5-- is less than the re"uired rate of return 94.73G Q 12G:.
05
+tatement sho&ing calculation of profita ility inde( 9-s in crores:
YR ROE INC TA, PAT DEP CFAT PVM <FL PV4 CFAT C4O PVOF COF
? 1 2 3 4 5 0 6 7 > 1? 11 12 13 14 15 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 ? ? ? ? ? ? ? ? ? ? 22.7 ? 22.7 ? 22.7 ? 22.7 ? 22.7 ? 05.1 2 05.1 2 05.1 2 05.1 2 05.1 2 05.1 2 05.1 2 05.1 2 05.1 2 05.1 2 42.3 2 42.3 2 42.3 2 42.3 2 42.3 2 16?.4 ? 16?.4 ? 16?.4 ? 16?.4 ? 16?.4 ? 16?.4 ? 16?.4 ? 16?.4 ? 16?.4 ? 16?.4 ? 14.2? 14.2? 14.2? 14.2? 14.2?
00
1.?? 235.5 2 235.5 2 235.5 2 235.5 2 235.5 2 235.5 2 235.5 2 235.5 2 235.5 2 235.5 2 50.52 50.52 50.52 50.52 50.52 ?.7> 3 ?.6> 6 ?.61 2 ?.03 0 ?.50 6 ?.5? 6 ?.45 2 ?.4? 4 ?.30 1 ?.32 2 ?.27 6 ?.25 6 ?.22 > ?.2? 5 ?.17 3 21?.32 176.61 106.0> 14>.6> 133.54 11>.41 1?0.40 >5.15 >5.?2 65.74 10.22 14.53 12.>4 11.5> 1?.34
420. ? 16?. 4 16?. 4 16?. 4 16?. 4 16?. 4 16?. 4 16?. 4 16?. 4 16?. 4 16?. 4 ? ? ? ? ?
420.?? 152.16 125.71 121.32 1?7.36 >0.02 70.3> 66.?2 07.74 01.51 54.76 ? ? ? ? ?
10 16 17 1> 2? 21 22 23 24
5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 5>.0 4 14>1
5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 5.4 7 136
22.7 ? 22.7 ? 22.7 ? 22.7 ? 22.7 ? 22.7 ? 22.7 ? 22.7 ? 22.7 ? 342
42.3 2 42.3 2 42.3 2 42.3 2 42.3 2 42.3 2 42.3 2 42.3 2 42.3 2 1270
14.2? 14.2? 14.2? 14.2? 14.2? 14.2? 14.2? 14.2? 14.2? 1>16
50.52 50.52 50.52 50.52 50.52 50.52 50.52 50.52 50.52 32?3
?.10 3 ?.14 0 ?.13 ? ?.11 0 ?.1? 4 ?.?> 3 ?.?7 3 ?.?6 4 ?.?0 0
>.21 7.25 6.35 0.50 5.77 5.20 4.0> 4.17 3.63 14541.> >
? ? ? ? ? ? ? ? ?
? ? ? ? ? ? ? ? ? 1377.>2
8M of cash inflo&s 8rofita ility inde( N -----------------------------8M of cash outflo& 38M 3et profita ility inde( N --------------------Initial cash outflo&
Eorm the a o#e ta le calculated #alues are 8resent Malue of Cash inflo& N 1454.>>
8resent Malue of Cash outflo& N 1377.>2 1454.>>
06
8rofita ility inde(
N
-----------------1377.>2
N
1.?46
0.?6 3et profita ility inde( N ------------------1377.>2 N 3.3,T 8-,+,3T M5;H, The 3et present Malue 938M: method is the classic economic method of e#aluating the in#estment proposals. It is one of the discounted cash flo& techni"ues e(plicitly recognizing the time #alue of money. It correctly postulates that cash flo&s arising at different time periods differ in #alue and the compara le only &hen their e"ui#alent present #alues are found out. The follo&ing steps are in#ol#ed in the calculation of 38M. ? Cash flo&s of the in#estment pro'ect should e forecasted ased on realistic assumptions. ? 5ppropriate discount rate should e identified to discount the forecasted cash flo&. The appropriate discount rate is the firm!s opportunity cost of capital* &hich is e"ual to the re"uired rate of return* e(pected y in#estors on in#estment of e"ui#alent ris%. ? 8resent #alue of cash flo&s should e calculated using opportunity cost of capital as the discount rate.
07
?.?46
? 3et present #alue should e found out y su tracting present #alue of cash outflo& from present #alue of cash inflo&.
5cceptance criteriaC The pro'ect should e accepted if 38M is positi#e. it should e clear that the acceptance rule using 38M method is to accept the in#estment pro'ect if its net present rule #alue is positi#e 938M C5+1 2HTE;2<:. The positi#e net present #alue &ill result if the pro'ect generates cash inflo&s at rate higher than the opportunity cost of capital. 5 pro'ect may e accepted in 38M N ?.
Thus* the 38M acceptance rules areC ? 5ccept if 38M N ? ? -e'ect if 38M Q ? ? Ill-defined if 38MN ?. Initial in#estment 5nnual Cash Elo& ;ife of the pro'ect /CE rate of return 9say: -----sC 4* ??*??? -sC 1* ??* ??? -sC 1? years 21.4G
0>
=ear
Capital in the eginning of the year
3et +urplus in the year
8ayment of interest U21.41G
-eco#er y of capital 95:
Capital at the end of the year 90:
91:
92:
93:
94:
1 2 3 4 5 0 6 7 > 1?
4*??*??? 3*75*052 3*07*232 3*46*151 3*21*470 2*>?*320 2*52*4>4 2*?0*501 1*5?*6>2 73*?71
1*??*??? 1*??*??? 1*??*??? 1*??*??? 1*??*??? 1*??*??? 1*??*??? 1*??*??? 1*??*??? 1*??*???
75*052 75*57? 67*>1> 64*335 03*74? 02*107 54*?06 44*231 32*27> 16*6>?
14*347 16*42? 21*?71 25*005 31*10? 36*732 45*>33 55*60> 06*611 72*21?
3*75*052 3*07*232 3*46*151 3*21*470 2*>?*320 2*52*4>4 2*?0*501 1*5?*6>2 73*?71 761
3*>>*12>
INTERPRETATION9
The small margin of difference 9-s.761:is accounted y the error in
interpolation of the rate of the return. It &ill e seen that at the discount
6?
rate of 21.41G* the pro'ect has reco#ered the original cost in full 9col.5:* a part from paying off interest at the same rate
PROVISION OF I#S AT = LOCATIONSON VI:AYAWADABVISHA-APATNA+ SECT S4No P!rtic$"!rs Ye!r C!s& o$t*"o1 net C!s& *"o1 Fi $res in (CCCHs)
C!s& Tri!" r!te <DL < Ti)in 1or0s < <FE>> C @DE=E Ro""in stoc0 Sp!rBes In*"o1 F!ctor V!"$e
F!c
Initi!" e5pen%it$re
FCC=B CD FCCDB C>
C
<FE>>
<E=<<
C C C
@DE=E
<4<D
@DE=E
<
F Cost o* rep"!ce)ent #!""!st F<CF= E?CCC SOT FCFDB F> C C4C@D C
61
FC@FB @@ @ Ann$!" net s!3in s FC@=B @D < to @C <<<?C <<<?C
E?CCC
C4C<=G
D?G ?F>@E =EGG?
?4>FG E Resi%$!" 3!"$e FC@=B @D @C E?CC E?CC C4CCG E<
=?C@=
<FFC< Net 3!"$e
8MU;- - C2E There fore* I--N;-R----------------------------------------( -ate /ifference 8MU;--8MU105?30-52734 N16GR------------------------------------- ( 5 122?1R2>34 122?1 N 16GR------------------------------------- ( 5 15135 N 16G R ?.7?G N21.?3G InterpretationC
62
Therefore* I-- lies at 21.?3G. It is a point &here outflo& N inflo& 5nd I--P@* Therefore it is accepted.
CALCULATION OF VARIOUS INPUTS PROVISION OF IBS AT 6 LOCATION ON VIJAYAWADA- VISHAKAPATNAM SECTION
UP TOTAL 5#erage no. of goods trains detained Eor the path per day 3? 5#erage no. of goods trains detained 8er month for path >?? 5#erage detention per train 1? +a#ings in detention to trains >??? 5#erage detention per month 9in hrs: 15? Total num er of engines detained >?? 45? 45? 65 65 45?? 45?? 45? 45? 15 15 DOWN
63
SAVING ON ROLLING STOCK SAVING ON LOCOS ,ngine hours sa#ed per month 9in hrs: 15? N 65 65
,ngines hours sa#ed per year N >?? >?? 17?? cost of diesel electric engine hour9in rupees: N 612 612? 1424? +a#ing per annum 9-s in la%h: 127.10 23 <5423+ +a#ings on rolling stoc% 5#erage detention per train 9in minutes: N N N 1? 3? 1?? 5?? 60?4 21.66 10.3? 35.4> 5#erage 3o of trains detained per day 9in oth direction: 5#erage no of &agons per train 5nticipated sa#ings in detention per day 9in hrs: +a#ings in &agon days per year +a#ings in &agons incl. 8ro#ision for repair.maintainanaceU4.5G Cost of B2K3 9-upees in la%h: Considering 1?G of the cost of B2K3 <agon as sa#ings 3,T +5MI34+ 9-s la%hs: 23 ;2C2+ 23 <5423+ T2T5; +5MI34+ ;,++C 3G of Cost of the proposal for maintenance 3,T +5MI34+ considering only 65G of the net sa#ings as assessed
64
N
04.?7
04.?7
21.66 K 1?D1?? K 10.3?
127.10 35.4> 103.05 14.> 147.00 111.5?
C2+T Ci#il engineering ,arth &or% 8.&ay Ballast +tructure portion Bridge portion Temp. ,sta lishment +.T ,lectrical- Traction ,lectrical- 4eneral Total -,+I/H5; M5;H, 2E 5++,T+ Cost ;ife in =ears +ignal and Telecommunication Ballast 8ermanent &ay Tot!" 45???.?? ?.?? ?.?? 25 4? 0? 1?L 1?G 1?G Rs4
9-s in la%hs:
3?.?? 45?.?? 1>.52 4>>.52 9R$pees in PCCCHs: -esidual life -esidual Malue
E?CC.CC ?.?? ?.?? E?CC4CC
65
+2HT1 C,3T-5; -5I;<5= 8-I;IAI35-= <2-@+ 8-24-5AA, 2??6-?7* /,A53/ 3o.10 8;53 1,5/C T-5EEIC E5CI;ITI,+
60
Item 3o.
8articulars of &or%
5llocat- 5nticipated ion Cost
2utlay proposed for 2??6-?7
Balance
Justification for pro#ision of 0 IB+ et&een T2H-3L/ 9?>. 0> @A: BMA-5@89>.46 @A: 3-8--,4 9>.41 @A:* T1= F /M/ 9>.37 @A:* 53M-1MA 9>.11 @A: -,4-=;A 97.35 @A: 23 BL5-M+@8 +ection.
C58
4>>52.??
1???
47>52
B-,5@ H8 2E C2+T 9-s. In ???!s:
66
/epartment CIMI; + .T ,lec T-/ T2T5;
Total 3???.?? 45???.?? 1>52.?? ??.?? 4>>52.??
FINDIN.S
? It is estimated that a capital re"uirements of 2 la%hs of crores is re"uired to complete the thousands of included in e(isting pro'ects. pro'ects already
67
? 5ctual realization of rate of return pro'ected in at the time of pro'ect appraisal &ill depend on timely completion of pro'ect &ith out any time o#er run and cost o#er run.
? The financing of -ail&ays pro'ects is organized at Indian -ail&ay le#el unli%e 8u lic +ector Hnits D8ri#ate companies &ere in Ban% Einance in#ol#ed.
CONCLUSION
? The 38M method follo&ed on -ail&ays is satisfactory.
6>
? The I-- method &or%ed to e#aluate the -ail&ay pro'ects is ased on /iscounted Cash Elo& Techni"ue.
? In this method* the unit Cost <or%ed out y traffic costing department of -ail&ay is adopted. The unit costs are updated continuously i.e.* e#ery year after closure of Einancial 5ccounts of -ail&ays.
? In the t&o pro'ects selected for studying the methods of financial e#aluation of -ail&ays pro'ects it is seen the rate of return is estimated 16G to 22G.
#oo0s O A$t&ors
EI353CI5; A5354,A,3T 8-5+5335 C153/-5
=t& E%ition
7?
FINANCIAL +ANA.E+ENT
I4+4PANDEY
FINANCIAL MANAGEMENT EI353CI5; A5354,A,3T
@153 53/ J5I3 F.M.VANHORNE
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71
doc_495443859.doc