investment management.doc

8/10/2019 Investment Management.doc

1/77

A Project report on

Investment Management

BY

P.SUPRIYA

(HT.No: 098 060 132)

Project submitted in partial fulfillment for the award of the Degree ofMASTER OF BUSINESS ADMINISTRATION

by

Osmania University, Hyderabad -50000


2/77

DECLARATION

I hereby declare that this Project Report titled INVESTMENT

MANAEMENT submitted by me to the Department of Business

Management, O!, "yderabad, is a bonafide #or$ underta$en by me and it is not

submitted to any other !ni%ersity or Institution for the a#ard of any degree

diploma& certificate or published any time before

'ame and Address of the (tudent (ignature of the (tudent

P(!PRIYA)lat no*+, Road 'o

Al$apuri,-B'agar,

"yderabad


3/77

ANNE!URE II

CERTI"ICATION

.his is to certify that the Project Report title -ogistics Management

submitted in partial fulfillment for the a#ard of MBA Programme of

Department of Business Management, O! "yderabad, #as carried out by

/0Ramana Reddy under my guidance .his has not been submitted to any

other !ni%ersity or Institution for the a#ard of any

degree&diploma&certificate

'ame and address of the 1uide (ignature of the 1uider

"ead of the Department 2MBA3 Principal

Project 1uide


4/77

Abstract

- og is ti c M an a ge me n t i s a c ro ss f un ct io na l a p pr oa c h t o m an a gi ng t he

m o % e m e n t o f r a # m a t e r i a l s i n t o a n o r g a n i s a t i o n , c e r t a i n a s p e c t s o f t h e

i nt er na l p ro ce ss in g o f m at er ia ls i nt o f in is he d g oo ds a nd t he n t he

m o % e m e n t o f t h e f i n i s h e d g o o d s o u t o f t h e o r g a n i s a t i o n t o # a r d s t h e e n d

c on su me r As o rg an is at io n s tr i% e f oc us o n c or e c om pe te nc ie s a nd

beco ming mo re f l e4 ib le th ey h a%e r educed o#ner sh ip o f r a# mate r i a l s

. h es e f u nc t io n s a r e i n cr e as i ng l y o u ts o ur c ed t o o t he r e n ti tl e s t h at c a n

pe r f o rm the a c t i% i t i e s be t t e r o r lo #er co s t e f fec t i%e l y th e e f fec t i s t o

i n c r ea s e t h e n u m b er o f o r g an i s a ti o n s i n % o l % e d i n s a t is f y in g t h e c u s t o m e r

d e m a n d # h i l e r e d u c i n g ( u p p l y 5 h a i n O p e r a t i o n s - e s s c o n t r o l a n d m o r e

l og i s t i c s pa r t ne r s l ed t o t he c r ea t i on o f Lo#$% & $'% *#++*&

.he purp ose o f -og i s t i c s manage ment i s to i mp ro%e t r us t and

c o ll a bo r at i on a m on g s u pp l ie r s a n d c u st o me r i e , a m on g s u pp l y c h ai n

pa r t ne r s o f the o rgan i sa t ion t hus i mpro% ing i n%en t o r y % i s i b i l i t y and

i mpr o% i ng i n%en t o r y %e l oc i t y

L o# $ %& $ '% M * #+ +* & s pa ns a ll m o% em en t a nd s to ra ge o f r a#

m a t e r i a l s , # o r $ i n p r o g r e s s i n % e n t o r y a n d f i n i s h e d g o o d s f r o m p o i n t o f

o r i g i n t o po i n t o f cons umpt i on


5/77

AC,NO-LEDEMENT

I a m d e e p l y i n d e b t e d t o my " e a d o f t h e d e p a r t me n t a n d g u i d eM.V$%/*& # ho h a% e b ee n a g re at s ou rc e o f s tr en gt h a nd

insp i ra t ion a t e%ery s tage of pro jec t #or$

I # o u l d l i $ e t o a c $ n o # l e d g e m y s i n c e r e t h a n $ s t o

M % . I* $ R + p r i n c i p a l a n d M . R # 4 R +

D i r e c t o r o f ( t P a u l s P 1 5 o l l e g e f o r m a $ i n g a l l t h e

f a c i l i t i e s a % a i l a b l e t o m e

I am e4 t remely than$ ing to Mr R ,$%* , Deputy 1enera l

M an ag er 2 "u ma n R es ou rc es 3 a nd M r N +% N & 5 * D5

manager , /ond la$o i , Mr Mahade%udu o f In%en to ry Managemen t

and Mr (a th ish of Inbound opera t ions of Rel iance Reta i l -td and

a l so o t h e r s t a f f me mb e r s o f R e l i a n c e R e t a i l l t d , # i t h o u t t h e i r

$ in d c o6 op er at io n a nd h el p t he p ro je ct c ou ld n ot h a% e b ee n

successfu l

2/0RAMA'A R7DDY3

T7+ o Co*&+*&% P#+ No.


6/77

Chapter 1: Introduction

I*&o'&$o* 1

O5+'&$4+% 2 M+&oo7o# 3

S'o+ ;

5hapter 89 Re%ie# of -iterature

I*&o'&$o* 6

Lo#$%&$'% Po7+% 1;

S##+%&$o*% &o $o4+ 1$* '&+#o$?&$o* * %&o'@$*# +&$7% 4$$$


8/77

Chapter

-1Introduction


9/77


10/77

NEED "OR THE STUDY

.he project study is underta$en to analy:e and understand the 5apital

Budgeting process in po#er sector, #hich gi%es mean e4posure to practical

implication of theory $no#ledge

.o $no# about the company;s operations of using %arious 5apital budgeting

techni


11/77

O>ECTIVES O" THE STUDY

.o study the rele%ance of capital budgeting in e%aluating the project

.o study the techni


12/77

METHODOLOY

.o achie%e a fore said objecti%e the follo#ing methodology has been adopted .he

information for this report has been collected through the primary and secondary

sources

P$ %o'+%:

It is also called as first handed information the data is collected through the

obser%ation in the organi:ation and inter%ie#s #ith officials By as$ing


13/77

LIMITATIONS O" THE STUDY

-ac$ of a#areness of po#er generation sector of AP17'5O -td

-ac$ of time is another limiting factor the schedule period = #ee$s are

not sufficient to ma$e the study independently regarding 5apital budgeting

in AP17'5O -td

.he busy schedule of the officials in the AP17'5O -td is another

limiting factor Due to the busy schedule of officials restricted me to collectthe complete information about organi:ation

'on6a%ailability of confidential financial data

.he study is conducted in a short period, #hich #as not detailed in all

aspects


14/77

PLAN O" THE STUDY

I'.ROD!5.IO'

'eed for the study

Objecti%es of the study

Methodology of the study

-imitations

5OMPA'Y PRO)I-7

"istory of AP17'5O

-andmar$s and Achie%ements

Performance of AP17'5O

5O'57P.!A- A'D ."7OR7.I5A- )RAM7>OR/

Introduction to 5apital Budgeting

Importance of 5apital Budgeting

5apital Budgeting process

Methods of 5apital Budgeting techni


15/77


16/77

HISTORY O" APENCO:

>hen AP(7B came in to e4istence in ?@*@, AP(7B started functioning #ith the

objecti%es of maintaining the po#er sector efficiently and economically

simultaneously ensuring demand meets the supply D$*# &+ 7%& +'+

$*+B&+ ''$& $&$o* * 7o/ %%&+ +B+*' o+&$o* o 7+%% &*

;8.< H? o o+ &+* 7 +'+ 'o*%$+7 +'+ &+ o/+ %7+7$$7$&. T+ $7*'+ o &+ +4+*+% #$*%& &+ 'o%& o o'&$o* *o

%$#*$$'*& +'&$o* $* &+'*$'7 7o%%+% * +*+# &+&% $# 'o%&%

'%+% o IPP% o&+ SE>% #77 /o%+*+ &+ $**'$7 o%$&$o*

o APSE>.


17/77

HIH LEVEL COMMITTEE AND ITS RECOMMENDATIONS:

1o%ernment of Andhra Pradesh reali:ing the declining tendency of the financial

position of AP(7B and considering the 1o%ernment of India;s -iberali:ed

policy fir attracting pri%ate in%estment into po#er sector, set up a high le%el

committee in anuary ?@@* to loo$ into present #or$ing of the AP(7B and

suggest remedies for impro%ement

.he committee after detailed deliberations #ith all the concerned and critical

analysis submitted the report in #hich it suggested some recommendations

1o%ernment of Andhra Pradesh considering the recommendations made bycommittee had embar$ed upon the AP 7-75.RI5I.Y R7)ORM( A5. in

?@@ As a se


18/77

A>OUT APENCO:

Andhra Pradesh Po#er 1eneration 5orporation -imited is one of the Pi%otal

organi:ations of Andhra Pradesh, engaged in the business of po#er generation

Apart from operation and maintenance of the of the po#er plants it has underta$en

the e4ecution of the ongoing and ne# po#er projects scheduled under capacity

addition programme and is ta$ing up reno%ation and moderni:ation #or$s of the

old po#er stations

AP17'5O came into e4istence on 8?8?@@ and commenced operations from

C?C8?@@@ .his #as a se


19/77

OUR VISION:

.o be the best po#er utility in the country and one of the best in the #orld

OUR MISSION:

.o generate ade


20/77

LANDMAR,S AND ACHIEVEMENTS:

APENCOis the third -argest Po#er utility in the country in terms of

Installed 5apacity6=*C@M> Our "ydro Installed 5apacity +*= M> is the highest in the country

.hermal plants are consistently #inning the 1old and (il%er medals for

Meritorious Producti%ity A#ard

A%ailability of thermal plants has been 2o%er a decade3 #ell abo%e the

national a%erage

Recently (risailam -eft Ban$ Po#er "ouse, a uni


21/77

(ince ?@@6@* 0.P( and R.PP are occupying top t#o positions in terms

of P-) ran$ings, e4cept in the year ?@@@6CC in #hich R.PP stood second

0.P( stood )IR(. in the country during ?@@6@*,?@@*6@=,?@@=6@G,?@@G6

@and 8CC?6C8 and R.PP stood first in the country during ?@@6@@,8CCC6

C?,8CC86C+ and 8CC+6C

R.PP has been recei%ing meritorious producti%ity A#ard for last si4

consecuti%e years and bagged 1old Medal fi%e years in a ro# since ?@@6@@

0.P( has been recei%ing Meritorious Producti%ity A#ard for last t#enty

consecuti%e years and bagged 1old Medal @ times in a ro# since ?@@6@*

/.P( 0 (tage has been recei%ing Meritorious Producti%ity A#ard for last

four consecuti%e years and bagged gold medal four times in a ro# since

?@@@6CC

Ao& VTPS STAEIV (1


22/77

INSTALLED CAPACITYTHERMAL

NAME O" THERMAL PO-ER

STATION

NO.O"

UNITS

I'(.A--7D

5APA5I.Y

0.P( 28?CM>) = ?8=CM>

R.PP 28?CM>3 2 8CM>/.P( 6AB5 24=CM>J4?8CM>3 8 G8CM>

/.P(60 28*CM>3 8 *CCM>

RAMA1!'DAM ."7RMA-

(.A.IO'

? =8M>

TOTAL THERMAL CAPACITY 19 2962M-

APENCO IS THE 3RDLAREST THERMAL ENERATION UTILITY

IN THE COUNTRY.

N+ o &+

%&&

$o*

C'$&

'.P5 8+,+*M>

MA"A17'5O ?C,++?M>

AP17'5O =,**?M>

APENCO IS THE HIHEST HYDRO ENERATION UTILITY IN

THE COUNTRY.

NAME O" THE STATION CAPACITY

AP17'5O +*= M>

/P5-6/AR'A.A/A +?+* M>

'"P5 8GG+C M>

88


23/77

OPERATIONAL PER"OMANCE

OVERALL PER"OMANCE O" APENCO

YEAR

ENARATION

(MU) APENCO

ALL INDIA

AVERAE

RAN,IN

8CC6C* 8++=C @G G

I

8CC+6

C 88**8 *= G8G

III

8CC86

C+ 8+C+8 @ G8?

II

8CC?6

C8 888* =+ GCC

I

8CCC6

C? 8?@+ *? =G

I

?@@@6

CC 8?@@ +8 =G*

II

?@@6

@@ ?@+ GG= ==

III

?@@G6

@ ?@C?@ 8+ =@

I

?@@=6

@G ?=G8C G? =*

I

?@@*6

@= ?*?C+ G8 =+?

I

?@@6

@* ?C8 GC? =C?

II

PLANT -ISE PER"ORMANCE

STATION

ENERATION (MU) PL" F

2003

0;

200;

0or$men compensation Act and "ealth and (afety Acts of !/

and !(A and safety measures are being implemented

ASH UTILISATION

.he annual generation of fly ash from .hermal Po#er Plants of AP17'5O is

presently around = million tons&annum AP17'5O has been implementingfollo#ing measures

8


29/77

Dry fly ash and pond ash are issued free of cost to all consumers

Bric$ plants are set up at 0.P(, R.PP and /.P(

Research and field tests are under#ay through Acharya '1 Ranga

Agricultural !ni%ersity 2A'1RA!3 and Department of Agriculture,

1OAP to establish benefits #ith fly ash use for agriculture for all crops in

the different agro6climate :ones of Andhra Pradesh

)easibility of ash sto#ing to mines is under study Ash utili:ation has

#itnessed impro%ement year by year as sho#n in the bar chart

IS0 1;001 CERTI"ICATION

AP17'5O is in the process of being certified for I(O ?CC? 7n%ironmental

Management (ystems in a phased manner at tits thermal po#er stations such as

0ijay >ada .hermal Po#er (tation, Rayalaseema .hermal Po#er Project,

/othagudem .hermal Po#er (tation (tage60 and /othagudem .hermal po#er

(tation2old3 I(O ?CC? 5ertification process has started at Rayalseema

.hermal Po#er Project during une8CC+ and is e4pected to be completed by

(eptember 8CC at other thermal po#er stations certification process #ill be

ta$en up in phased manner

OALS ARE TO >E ACHIEVED

.o achie%e emission standards at all thermal po#er stations by

underta$ing suitable up gradation&modifications in the system

8@


30/77

.o achie%e effluents standards at all thermal po#er stations by adopting

suitable treatment systems

.o ensure :ero discharge of effluents from the plants by installing re6

cycling are re6use systems at major po#er plants ie, 0.P( and /.P(

.o de%elop I(O ?CC? 7n%ironmental Management (ystems for major

thermal po#er stations of AP17'5O

.o achie%e ash utili:ations as per action plans submitted to the MO7J)

notification dated ?C@?@@@

.o de%elop greenbelt in the #ider area by adding considerable number of

trees e%ery year at po#er stations

.o strengthen the 7n%ironmental Management cells, its performance in

monitoring and auditing, pro%iding training on the rele%ant aspects

+C


31/77

O#*$?&$o*7 C&

+?

S$ A.,.o7 (I.A.S)

C$*

S$ A5 $* (I.A.S)

M*#$*# D$+'&o

S$ .V$5 ,

D$+'&o (T+7)

S$ U..,$%* M&

D$+'&o (T+'*$'73

S$. .A$%+%

D$+'&o (H+7)

S$ V.V++ RoD$+'&o (Co+'$7)

S$ D.P@ Ro

D$+'&o ("$**'+)


32/77

+8


33/77

CAPITAL >UDETIN

I*&o'&$o*:

.he term 5apital Budgeting refers to long term planning for proposed capital

outlay and their financing It includes raising long6term funds and their

utili:ation It may be defined as a firm;s formal process of ac


34/77

5apital budgeting is concerned #ith allocation of the firm;s scarce financial

resources among the a%ailable mar$et opportunities .he consideration of

in%estment opportunities .he consideration of in%estment opportunities

in%ol%es the comparison of the e4pected future streams of earnings from a

project #ith immediate and subse


35/77

.hey ha%e a long terms are significant effect on the profitability of the

concern

.hey in%ol%e huge funds

.hey are irre%ersible decisions .hey are strategic decisions associated

#ith high degree of ris$

IMPORTANCE O" CAPITAL >UDETIN:

.he importance of capital budgeting can be understood from the fact that an

unsound in%estment decision may pro%e to be fatal to the %ery e4istence of the

organi:ation

.he importance of capital budgeting arises mainly due to the follo#ing9

1.L#+ $*4+%&+*&:

5apital budgeting decision, generally in%ol%es large in%estment of funds But

the funds a%ailable #ith the firm are scarce and the demand for funds for

e4ceeds resources "ence, it is %ery important for a firm to plan and control its

capital e4penditure

2. Lo*# &+ 'o$&+*& o *%:

5apital e4penditure in%ol%es not only large amount of funds but also funds for

long6term or an permanent basis .he long6term commitment of funds increases

the financial ris$ in%ol%ed in the in%estment decision

3. I+4+%$7+ *&+:

.he 5apital e4penditure decisions are of irre%ersible nature Once, the decision

for ac


36/77

;. Lo*# &+% ++'& o* o$&$7$&:

5apital budgeting decision has a long term and significant effect on the

profitability of a concern 'ot only the present earnings of the firm are affected

by the in%estments in capital assets but also the future gro#th and profitability

of the firm depends up to the in%estment decision ta$en today 5apital

budgeting decision has utmost importance to a%oid o%er or under in%estment in

fi4ed assets


37/77

In general, the projects can be categori:ed as follo#s9

? )rom the point of %ie# of firmKs e4istence9 .he capital budgeting decisions

may be ta$en by a ne#ly incorporated firm or by an already e4isting firm

a) 'e# )irm9 A ne#ly incorporated firm may be re


38/77

2ii3 Di%ersification: (ome times, the firm may be interested to di%ersify

into ne# product lines, ne# mar$ets, production of spare parts etc. In

such a case, the finance manager is re


39/77

can be selected It may be noted that the mutually e4clusi%e alternati%es, as only

one of these can be selected It may be noted here that the mutually e4clusi%e

projects decisions are not independent of the accept H reject decisions

($$$) C$&7 R&$o*$*# D+'$%$o*%:

In a situation #here the firm has unlimited funds all independent in%estment

proposals yielding return greater than some pre6determined le%els are

accepted "o#e%er this situation does not pre%ail in most of the business

firms in actual practice .hey ha%e a fi4ed capital budget A large number

of in%estment proposals compete for these limited funds the firm must

therefore ration them .he firm allocates funds to projects in a manner

that it ma4imi:es long run returns this, capital 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 acceptable !nder the accept6reject decision capital rationing

employees ran$ing of the acceptable in%estments projects .he projects

can be ran$ed on the basis of a predetermined criterion such as the rate of

return .he projects are ran$ed in the descending order of the rate of

return

PRO>LEMS AND DI""ICULTIES IN CAPITAL >UDETN:

.he problems in capital budgeting decisions may be as follo#s9

a3 )uture uncertainty9 5apital budgeting decisions in%ol%e long term

commitments "o#e%er there is lot of uncertainty in the long term .he

uncertainty may be #ith reference to cost of the project, future e4pected

returns, future competition, legal pro%isions, political situation etc

b3 .ime 7lement9 .he implications of a 5apital Budgeting decision are

scattered o%er a long period .he cost and benefits of a decision may

occur at different points of time .he cost and benefits of a decision may

occur at different points of time .he cost of a project is incurred

+@


40/77

immediately "o#e%er, the in%estment is reco%ered o%er a number of

years .he future benefits ha%e to be adjusted to ma$e them comparable

#ith the cost -onger the time period in%ol%ed, greater #ould be the

uncertainty

c3 Difficulty in Luantification of impact .he finance manager may face

difficulties in measuring the cost and benefits of projects in UDETIN:

.he capital budgeting decision process is a multi6faceted and analytical process

A number of assumptions are re


41/77

accepted or rejected on the strength of its merits alone .he proposal #ill not be

considered in combination #ith other proposals to consider the ma4imum

utili:ation of a%ailable funds

?


42/77

CAPITAL >UDETIN PROCESS:

5apital budgeting is a comple4 process as it in%ol%es decisions relating to the

in%estment of current funds for the benefit to be achie%ed in future and the

future is al#ays uncertain "o#e%er, the follo#ing procedure may be adopted

in the process of 5apital Budgeting

I+*&$$'&$o* o $*4+%&+*& oo%7%:

.he capital budgeting process begins #ith the identification of in%estment

proposals .he proposal about potential in%estment opportunities may originate

either from top management or from any officer of the organi:ation .he

departmental head analysis the %arious proposals in the light of the corporate

strategies and submits the suitable proposals to the capital e4penditure planning

S'++*$*# Poo%7%:

.he e4penditure planning committee screens the %arious proposals recei%ed

from different departments .he committee %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 imbalances

E47&$o* o V$o% Poo%7%:

.he ne4t step in the capital budgeting process is to %arious proposals .he

methods, #hich may be used for this purpose such as, pay bac$ period method,

Rate of return method, 'P0 and IRR etc

"$$*# P$o$&$+%:

After e%aluating %arious proposals, the unprofitable uneconomical proposal may

be rejected but may not be possible for the firm to in%est immediately in all the

8


43/77

acceptable proposals due to limitation of funds .herefore, it essential to ran$

the projects&proposals after considering urgency, ris$ and profitability in%ol%ed

there in

"INAL APPROVAL AND PREPERATION O" CAPITAL

E!PENDITURE >UDET:

Proposals meeting the e%aluation and other criteria are finally appro%ed to be

included in the capital e4penditure budget .he e4penditure budget lays do#n

the amount of estimated e4penditure to be incurred on fi4ed assets during the

budget period

I7++*&$*# Poo%7%:

Preparation of a capital e4penditure budget and incorporation of a particular

proposal in the budget doesn;t itself authori:e to go ahead #ith the

implementation of the project A re


44/77

METHODS OR TECHNIGUES O" CAPITAL >UDETIN:

.here are many methods for e%aluating the profitability of in%estment

proposals .he %arious commonly used methods are

TECHNIGUES O" CAPITAL >UDETIN

Traditional Methods Time adjusted methods

? Pay bac$ ?'P08 Accounting rate of return 8IRR

+PI

T$&$o*7 +&o%:

2I3 Paybac$ period method 2PBP3

2II3 Accounting Rate of return method 2ARR3

T$+ 5%&+ o $%'o*&$*# &+'*$B+%:

2I3 'et Present %alue method 2'P03

2II3 Internal rate of return method 2IRR3

2III3 Profitability inde4 method 2PI3


45/77

1. PAY>AC, PERIOD METHOD:

.he pay bac$ some times called as payout or pay off period method represents

the period in #hich total in%estment in permanent assets pay bac$ itself .his

method is based on the principle that e%ery capital e4penditure pays itself bac$

#ith in a certain period out of the additional earnings generated from the capital

assets

D+'$%$o* 7+:

A project is accepted if its paybac$ period is less than the period specific

decision rule

A project is accepted if its paybac$ period is less than the period specified by

the management and %ice6%ersa

P >'@ P+$o

I*$&$7 C% O&7o/

A**7 C% I*7o/%

ADVANTAES:

(imple to understand and easy to calculate

It sa%es in costF it re


46/77

It does not ta$e into account the cash inflo#s earned after the pay bac$

period and hence the true profitability of the project cannot be

correctly assessed

.his method ignores the time %alue of the money and does notconsider 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 decisions

It is difficult to determine the minimum acceptable pay bac$ period,

#hich is subjecti%e decision

It treats each asset indi%idually in isolation #ith other assets, #hich is

not feasible in real practice

2.ACCOUNTIN RATE O" RETURN METHOD:

.his 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 because under this method the

concept of accounting profit 2'P after ta4 and depreciation3 is used rather than

cash inflo#s According to this method, %arious projects are ran$ed in order of

the rate of earnings or rate of return

D+'$%$o* 7+9

.he project #ith higher rate of return is selected and %ice H %ersa

.he return on in%estment method can be used in se%eral #ays, as

A4+#+ R&+ o R+&* M+&o:

=


47/77

!nder this method a%erage profit after ta4 and depreciation is calculated and

then it is di%ided by the total capital out lay

A%erage Annual profits 2after dep J ta43

A%erage rate of return 6666666666666666666666666666666666666666666666666664 ?CC

'et In%estment

ADVANTAES:

It is %ery simple to understand and easy to calculate

It uses the entire earnings of a project in calculating rate of return and

hence gi%es a true %ie# of profitability

As this method is based upon accounting profit, it can be readily

calculated from the financial data

DISADVANTAES:

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 profits are earned as a 8C rate of

return in

8 N years is considered to be better than ? rate if return in ?8 years

.his method cannot be applied to a situation #here in%estment in

project is to be made in parts

3. NET PRESENT VALUE METHOD:

.he 'P0 method is a modern method of e%aluating in%estment proposals .his

method ta$es in to consideration the time %alue of money and attempts to

calculate the return on in%estments by introducing time element .he net

G


48/77

present %alues of all inflo#s and outflo#s of cash during the entire life of the

project is determined separately for each year by discounting these flo#s #ith

firms cost of capital or predetermined rate .he steps in this method are

? Determine an appropriate rate of interest $no#n as cut off rate

8 5ompute the present %alue of cash outflo#s at the abo%e6determined

discount rate

+ 5ompute the present %alue of cash inflo#s at the predetermined rate

5alculate the 'P0 of the project by subtracting the present %alue of cash

outflo#s

)rom present %alue of cash inflo#s

D+'$%$o* 7+

Accept the project if the 'P0 of the project is C or %e that is present %alue of

cash inflo#s should be e


49/77

It may not gi%e good results #hile comparing projects #ith unehen annual cash flo#s are ehen the annual cash flo#s are une


50/77

P% of cash inflo#s at lo#er rate6P% of cash inflo#s at higher rate

.he steps are in%ol%ed here are

? Prepare the cash flo# table using assumed discount rate to discount the

net cash)lo#s to the present %alue

8 )ind out the 'P0, J if the 'P0 is positi%e, apply higher rate of discount

+ If the higher discount rate still gi%es a positi%e 'P0, increase the discount

rate further !ntil the 'P0 becomes :ero

If the 'P0 is negati%e, at a higher rate, 'P0 lies bet#een these t#o rates

ADVANTAES:

It ta$es into account, the time %alue of money and can be applied in

situations #ith e%en and e%en cash flo#s

It considers the profitability of the projects for its entire economic life

.he determination of cost of capital is not a pre6re


51/77

PRO"ITA>ILITY INDE! METHOD OR >ENE"IT COST RATIO

METHOD:

It is also a time6adjusted method of e%aluating the in%estment proposals PI also

called benefit cost ratio or desirability factor is the relationship bet#een present

%alue of cash inflo#s and the present %alues of cash outflo#s .hus

P0 of cash inflo#s

Profitability inde4 666666666666666666666666666666

P0 of cash outflo#s

'P0

'et profitability inde4 66666666666666666666666666666

Initial Outlay

ADVANTAES:

!nli$e net present %alue, the profitability inde4 method is used to ran$

the projects e%en #hen the costs of the projects differ significantly

It recogni:es the time %alue of money and is suitable to applied in a

situation #ith uniform cash outflo#s and une%en cash inflo#s

It ta$es into an account the earnings o%er the entire life of the project and

gi%es the true %ie# of the profitability of the in%estment

.a$es into consideration the objecti%e of ma4imum profitability

DISADVANTAES:

More difficult to understand and operate

*?


52/77

It may not gi%e good results #hile comparing projects #ith !ne


53/77


54/77

DATA ANALYSIS

INVESTMENT EVALUATION CRITERIA

.hree steps are in%ol%ed in the e%aluation of an in%estment9

7stimation of 5ash )lo#s

7stimation of the re


55/77

PAY >AC, PERIOD:

.he pay bac$ period is one of the most popular and #idely recogni:ed

traditional methods of e%aluating in%estment proposals It is defined as the

number of years re


56/77

ran$ing to the project, #hich has the shortest paybac$ period and lo#est ran$ing

to the project, #hich has highest paybac$ period

*=


57/77

STATEMENT SHO-IN CALCULALTION O" PAY >AC, PERIOD

YEAR ROE INC TA! PAT DEP C"AT CC"AT

? * ?C@* C =@G* ?=CC 8+GG* 8+GG*

8

* ?C@*

C

=@G*

?=CC

8+GG*

G*CC+

* ?C@*C

=@G*?=CC

8+GG*G?+8*

* ?C@*

C=@G*

?=CC8+GG*

@*?CC

** ?C@*

C=@G*

?=CC8+GG*

??G*

=* ?C@*

C=@G*

?=CC8+GG*

?8=*C

G* ?C@*

C=@G*

?=CC8+GG*

?==8*

* ?C@*

C

=@G*

?=CC

8+GG*

?@C8CC@

* ?C@*C

=@G*?=CC

8+GG*8?+@G*

?C* ?C@*

C=@G*

?=CC8+GG*

8+GG*C

??*

* 88* ?G ?CC **G 8++8

?8*

*88* ?G ?CC **G

8@C=

?+*

*88* ?G ?CC **G

8*

?*

*88* ?G ?CC **G

8=CC=8

?**

*88* ?G ?CC **G

8=*=C

?=*

*88* ?G ?CC **G

8G?8?

?G*

*88* ?G ?CC **G

8G=G@=

?*

*88* ?G ?CC **G

88+G

?@*

*88* ?G ?CC **G

8G@*8

8C*

*88* ?G ?CC **G

8@+*+C

8?*

*88* ?G ?CC **G

8@@?C

88*

*88* ?G ?CC **G

+C==

8+*

*88* ?G ?CC **G

+?C8=

8*

*88*

?G?CC **G

+?*8

8**

* 88* ?G ?CC **G +8?8C

Base Year hyear Re


58/77

'e4t year 5)A. 8+GG*

8?CC H ?@C8

Pay bac$ period @thyear 666666666666666666666666666 thyear C +yr

8+GG*

8.83 +%.

I*&++&&$o*:

As per pay bac$ period, the project is accepted because to get the initial

in%estment of 8?CC crores, it is ta$ing a time of + years (o the project can be

accepted

2.AVERAE RATE O" RETURN:

.he A%erage Rate of Return 2ARR3 is also $no#n as Accounting Rate of Return

using accounting information, as re%ealed by financial statements, to measure

the profitability of an in%estment .he accounting rate of return is found out by

di%iding the a%erage after ta4 profit by the a%erage in%estment .he a%eragein%estment #ould be e


59/77

STATEMENT SHO-IN CALCULATION O" AVERAE RATE O"

RETURN

YEAR ROE INC TA! PAT

? * ?C@* C =@G*

8 * ?C@* C =@G*

+ * ?C@* C =@G*

* ?C@* C =@G*

* * ?C@* C =@G*

= * ?C@* C =@G*

G * ?C@* C =@G*

* ?C@* C =@G*@ * ?C@* C =@G*

?C * ?C@* C =@G*

?? * * 88* ?G

?8 * * 88* ?G

?+ * * 88* ?G

? * * 88* ?G

?* * * 88* ?G

?= * * 88* ?G

?G * * 88* ?G? * * 88* ?G

?@ * * 88* ?G

8C * * 88* ?G

8? * * 88* ?G

88 * * 88* ?G

8+ * * 88* ?G

8 * * 88* ?G

8* * * 88* ?G

To&7 132;.20

CALCULATION O" ARR:

*@


60/77

A%erage 'PA. ?+88&8* *8@=

A%erage In%estment 8?CC&8 ?C*C

*8@=

ARR 6666666666 S ?CC


61/77

NET PRESENT VALUE:

.he 'et present %alue 2'P03 method is the classic economic method of

e%aluating the in%estment proposals It is one of the discounted cash flo#

techni


62/77

A''+&*'+ R7+:

.he project should be accepted if 'P0 is positi%e it should be clear that the

acceptance rule using 'P0 method is to accept the in%estment project if its netpresent %alue is negati%e 2'P0 5A(" O!.)-O>3 .he positi%e net present

%alue #ill result only if the project generates cash inflo#s at rate higher than the

opportunity cost of capital

A project may be accepted in 'P0 C

.hus, the 'P0 acceptance rules are9

Accept if 'P0 C

Reject if 'P0 QC

Ill6defined if 'P0 C

=8


63/77

=+


64/77

STATEMENT SHO-IN CALCULATION O" NET PRESENT VALUE

YR ROE INC TA! PAT DEP C"ATPVJ PV CASH PV O"

12F C"AT O." CO"

C ?CCC 8CCC 8CCC

? * ?C@* C =@G* ?=CC 8+GG* C@+ 8?8+? ?=CC ?*CC8

8 * ?C@* C =@G* ?=CC 8+GG* CG@G ?@@ ?=CC ?++@C+ * ?C@* C =@G* ?=CC 8+GG* CG?8 ?=@8 ?=CC ??@=8

* ?C@* C =@G* ?=CC 8+GG* C=+= ?*?8? ?=CC ?C=*

* * ?C@* C =@G* ?=CC 8+GG* C*=G ?+C ?=CC @*8=

= * ?C@* C =@G* ?=CC 8+GG* C*CG ?8C* ?=CC *?

G * ?C@* C =@G* ?=CC 8+GG* C*8 ?CG= ?=CC G*@

* ?C@* C =@G* ?=CC 8+GG* CC @=C* ?=CC =GG

@ * ?C@* C =@G* ?=CC 8+GG* C+=? *+ ?=CC =C=*

?C * ?C@* C =@G* ?=CC 8+GG* C+88 G=*= ?=CC *?C

?? * * 88* ?G ?CC **G C8G ?=C? C C

?8 * * 88* ?G ?CC **G C8*G ?+ C C

?+ * * 88* ?G ?CC **G C88@ ?8GG C C

? * * 88* ?G ?CC **G C8C* ??+ C C

?* * * 88* ?G ?CC **G C?+ ?C8? C C

?= * * 88* ?G ?CC **G C?=+ @C@ C C

?G * * 88* ?G ?CC **G C?= ? C C

? * * 88* ?G ?CC **G C?+C G8* C C

?@ * * 88* ?G ?CC **G C??= =G C C

8C * * 88* ?G ?CC **G C?C *C C C

8? * * 88* ?G ?CC **G CC@+ *? C C

88 * * 88* ?G ?CC **G CC+ =+ C C

8+ * * 88* ?G ?CC **G CCG ?+ C C

8 * * 88* ?G ?CC **G CC== += C C

8* * * 88* ?G ?CC **G CC*@ +8@ C C

1;6


65/77

Present %alue of cash inflo# 1;6


66/77

PRO"ITA>ILITY INDE!:

It is also called as Benefit 5ost Ratio It is also a time6adjusted method of

e%aluating the in%esting proposals It is the relationship bet#een present %alue

of cash inflo#s and the present %alue of cash outflo#s .hus

(.A.7M7'. ("O>I'1 5A-5!-A.IO' O) PRO)I.ABI-I.Y I'D7S

YR ROE INC TA! PAT DEP C"ATPVJ PV O" CASH PV O"

12F C"AT O." CO"C ?CCC 8CCC 8CCC

? * ?C@* C =@G* ?=CC 8+GG* C@+ 8?8+? ?=CC ?*CC8

8 * ?C@* C =@G* ?=CC 8+GG* CG@G ?@@ ?=CC ?++@C

+ * ?C@* C =@G* ?=CC 8+GG* CG?8 ?=@8 ?=CC ??@=8

* ?C@* C =@G* ?=CC 8+GG* C=+= ?*?8? ?=CC ?C=*

* * ?C@* C =@G* ?=CC 8+GG* C*=G ?+C ?=CC @*8=

= * ?C@* C =@G* ?=CC 8+GG* C*CG ?8C* ?=CC *?

G * ?C@* C =@G* ?=CC 8+GG* C*8 ?CG= ?=CC G*@

* ?C@* C =@G* ?=CC 8+GG* CC @=C* ?=CC =GG

@ * ?C@* C =@G* ?=CC 8+GG* C+=? *+ ?=CC =C=*

?C * ?C@* C =@G* ?=CC 8+GG* C+88 G=*= ?=CC *?C

?? * * 88* ?G ?CC **G C8G ?=C? C C

?8 * * 88* ?G ?CC **G C8*G ?+ C C

?+ * * 88* ?G ?CC **G C88@ ?8GG C C

? * * 88* ?G ?CC **G C8C* ??+ C C

?* * * 88* ?G ?CC **G C?+ ?C8? C C

?= * * 88* ?G ?CC **G C?=+ @C@ C C

?G * * 88* ?G ?CC **G C?= ? C C

? * * 88* ?G ?CC **G C?+C G8* C C?@ * * 88* ?G ?CC **G C??= =G C C

8C * * 88* ?G ?CC **G C?C *C C C

8? * * 88* ?G ?CC **G CC@+ *? C C

88 * * 88* ?G ?CC **G CC+ =+ C C

8+ * * 88* ?G ?CC **G CCG ?+ C C

8 * * 88* ?G ?CC **G CC== += C C

8* * * 88* ?G ?CC **G CC*@ +8@ C C

1;6


67/77

P0 of cash inflo#s

Profitability Inde4 66666666666666666666666666

P0 of cash out flo#s

'P0

'et Profitability Inde4 66666666666666666666666666 Initial cash outlay

)rom the abo%e table calculated %alues are

Present %alue of cash inflo# ?=*@G

Present %alue of cash outflo# ?+=@+@

?=*@G

Profitability Inde4 6666666666666666666

?+=@+@

?CG?

@=*

'et Profitability Inde4 666666666666666 ?+=@+@

0.0=1

=G


68/77

INTERNAL RATE O" RETURN

.he internal rate of return 2IRR3 method is another discounted cash flo#

techni


69/77

ACCEPTANCE RULE

.he accept project rule, using the IRR method, is to accept the project if its

internal rate of return is higher than the opportunity cost of capital 2r$3 note

that $ is also $no#n as the re


70/77

STATEMENT SHO-IN THE CALCULATIONS O" INTERNAL RATE

O" RETURN

YR ROE INC TA! PAT DEP C"AT

PV J PV O" PV J PV O"

12F C"ATJ12F 13F C"ATJ13F

? * ?C@* C =@G* ?=CC 8+GG* C@+ 8?8+? C* 8?C?

8 * ?C@* C =@G* ?=CC 8+GG* CG@G ?@@ CG+ ?=?=

+ * ?C@* C =@G* ?=CC 8+GG* CG?8 ?=@8 C=@+ ?=G=

* ?C@* C =@G* ?=CC 8+GG* C=+= ?*?8? C=?+ ?*G

* * ?C@* C =@G* ?=CC 8+GG* C*=G ?+C C*+ ?8@?C

= * ?C@* C =@G* ?=CC 8+GG* C*CG ?8C* CC ???8

G * ?C@* C =@G* ?=CC 8+GG* C*8 ?CG= C8* ?C?C * ?C@* C =@G* ?=CC 8+GG* CC @=C* C+G= @+@

@ * ?C@* C =@G* ?=CC 8+GG* C+=? *+ C+++ G@?G

?C * ?C@* C =@G* ?=CC 8+GG* C+88 G=*= C8@* GC?

?? * * 88* ?G ?CC **G C8G ?=C? C8=? ?*=

?8 * * 88* ?G ?CC **G C8*G ?+ C8+? ?8@

?+ * * 88* ?G ?CC **G C88@ ?8GG C8C ??+

? * * 88* ?G ?CC **G C8C* ??+ C?? ?C?C

?* * * 88* ?G ?CC **G C?+ ?C8? C?=C @8

?= * * 88* ?G ?CC **G C?=+ @C@ C?? G=

?G * * 88* ?G ?CC **G C?= ? C?8* =@G? * * 88* ?G ?CC **G C?+C G8* C??? =?@

?@ * * 88* ?G ?CC **G C??= =G CC@ *G

8C * * 88* ?G ?CC **G C?C *C CCG *

8? * * 88* ?G ?CC **G CC@+ *? CCGG +C

88 * * 88* ?G ?CC **G CC+ =+ CC= +G@

8+ * * 88* ?G ?CC **G CCG ?+ CC=C ++*

8 * * 88* ?G ?CC **G CC== += CC*+ +CC

8* * * 88* ?G ?CC **G CC*@ +8@ CCG 8=8

1;6


71/77


72/77

RO7 8C 4 ?


73/77

Depreciation C of 55 8?CC 4 C ?=C

>hich is paid in ?C e


74/77

G


75/77

"INDINS:

.he po#er sector is a ser%ice sector #hich falls in basic infrastructure sector the

motto of in%estment is to ser%e the society rather than profit ma$ing hence the

social cost benefit analysis method to be follo#ed

.he net present %alue of 0.P(6I0 is satisfactory

.he internal rate of return of 0.P(6I0 is considerably high

.he 0.P(6I0 #ill ta$e long period to reco%er the initial in%estment

.he profitability inde4 is to meet company objecti%es

.he a%erage rate of return is %ery less because the motto is not to earn

profits .his is compensated by good benefits to the society

As discussed in earlier chapter AP17'5O follo#s, systems and

procedures as per the Andhra Pradesh (tate 7lectricity Act, accordingly

project initiati%e is ta$en up

>hile preparing project financing AP17'5O considers (ocial benefit ofthe state

AP17'5O generates the po#er based on re


76/77

G=


77/77

SUESTIONS

5ompany should go for the impro%ement in the technology to impro%e

efficiency and to decrease the cost of production per unit

)or society #ith lo#er income le%els or belo# po%erty line company

should go for subscribed rates and for industries it should increase its rate

marginally to co%er the losses

.he subscribed cost in future should be reduced

.he ris$ is associated #ith the project, since the generation period is high

1o%ernment of AP should pro%ide notional debt e

investment management.doc

Documents