report on calculation of cash flow and irr of new heat exchanger in rfo rundown circuit of guwahati...

2011

SUBMITTED BY,

SHRUTI BUCHA,

3RD SEMESTER

ROLL NO. :- NU/MN/14/10

SCHOOL OF MANAGEMENT & STUDIES

NAGALAND UNIVERSITY,

DIMAPUR CAMPUS

Report on Calculation of Cash Flow and IRR OF NEW HEAT EXCHANGER In RFO RUNDOWN CIRCUIT OF GUWAHATI REFINERY.

Indian oil Corporation LtdGuwahati Refinery Noonmati.

TABLE OF CONTENTS

Declaration

Preface

Acknowledgement

Bonafide Certificate

Executive summary

SL. NO. PARTICULARS

Chapter 1 Overall View Of Indian Oil Corporation Limited

1.1.1Brief History Of Oil Industry In India

1..1.2Beginning Of Petroleum Refining In India

1.1.3Indian Oil Corporate History

1.2About IOCL

1.2.1Introduction Of IOCL

1.2.2Vision, Mission Values, Functions& Duties, Objectives & Obligations

1.2.3Decision Making Process

1.2.4Organization Set-Up

1.2.5Business Of The Organization

1.2.6Branded Products Of IOCL

1.2.7Indian Oil Refineries-Installed Capacities

1.1.8Major Petroleum Products Of The Refineries Of IOCL

1.1.9SWOT Analysis Of IOCL

Chapter 2About Guwahati Refinery (NOONMATI)

1.2.1 Introduction Of Guwahati Refinery

School Of Management Studies(SMS) , Nagaland University Dimapur: Nagaland

1.2.2Manufacturing Process Of Guwahati Refinery

1.2.3Functions Of Each Sections Of Finance Department

1.2.4Section Wise Segregation

1..2.5ERP-SAP

Chapter 3Aims & Objectives & Methodology & Limitation Of The Project

Chapter 4Capital Budgeting

1.4.1Meaning & Type Of Budget

1.4.2Meaning , Need & Importance Of Capital Budgeting

1.4.3Capital Budgeting Process

1.4.4Factors influencing capital expenditure decision

1.4.5Investment Evaluation Techniques

1.4.6Limitations of capital budgeting

Chapter 5Name Of The Proposal

Brief Description

Justification Of The Proposal

Advantages

Technical Feasibility

Impact Of Proposal On Manpower

Operating And Maintenance Cost

Requirements Of Additional Working Capital

Economics

Phasing Of Expenditure

Approval

Completion Schedule


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Chapter 6Findings , Conclusion & Recommendations

Annexures

References

Bibliography

Word Of Thanks

PREFACE


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In today’s era of globalization and competition, coping up with technological

advancement, which is undergoing evolution at a very fast rate, holds the key to

the survival and growth of any organization. Installing technology, well-equipped

facilities or going for modification in the existing ones are the means to attain

better performance efficiency and hence further the value addition.

Indian Oil, the largest commercial enterprise of India (by sales turnover) is

India’s sole representative in Fortunes prestigious listing of world’s 500 largest

corporations, ranked 125th for the year 2011. To maintain strategic edge in the

market place, Indian Oil has given importance to capital budgeting because capital

investment decisions often represent the most important decisions taken by an

organization, and they are extremely important, they sometimes also pose

difficulties.

A company in practice should take all care in selecting a method or methods

of investment evaluation. The criterion selected should be a true measure of the

investment’s profitability (in terms of cash flows), and it should lead to the net

increase in the company’s wealth (that is, its benefits should exceed its cost

adjusted for time value and risk). It should also be seen that the evaluation criteria

do not discriminate between the investment proposals. They should be capable of

ranking projects correctly in terms of profitability. The NPV method is theoretically

the most desirable criterion as it is a true measure of profitability; it generally

ranks projects correctly and is consistent with the wealth maximization criterion.

ACKNOWLEDGEMENT School Of Management Studies(SMS) , Nagaland University Dimapur: Nagaland

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This training part of MBA programme taught me a lot to understand the key of

success in the organization. One of them is teamwork. Teamwork is ability to work

together towards a common vision. It is a fuel that allows common people to attain

results. Therefore, I would like to thank all management team of Indian Oil Corporation

Limited who help me to achieve this result.

I would hereby like to extend my gratitude to the following people without whose

cooperation and help at every stage, successful completion of the project would not have

been possible.

It is my privilege to express my deep gratitude to Mr. S. Gurumoorthy (CFM at

IOCL) who gave me such a great opportunity & infrastructure to do this project and also

for his kind cooperation & help throughout the project.

I would like to express my profound gratitude & a sincere thanks to Mr. Ritesh

Agarwal (ACO), Mr. Saurabh Suman (ACO) for their valuable time & educative

guidance. Their constant support, innovative ideas & practical approach helped me to

make the project more objective.

I would like to use this opportunity to thank my lecturers Mr. Ditalak Mpanme,HOD,

School Of Management Studies, and Mr. Dorendro Singh Laikangbam, Faculty, School of

Management Studies, for their support and guidance.

Last but not the least, I would like to thank all others who directly or indirectly

helped me in this regard.

Above all, thanks to the Almighty God.

SHRUTI BUCHASHRUTI BUCHA

33RDRD SEMESTER SEMESTER

STUDENT DECLARATION


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I hereby declare that the project report entitled, Calculation of “Cash Flow and IRR of New Heat Exchanger in RFO (Reduced Fuel Oil)” as per requirement of the 2 YEAR FULL TIME POST GRADUATE DIPLOMA IN MANAGEMENT (MBA) AT SCHOOL OF MANAGEMENT STUDIES (SMS), NAGALAND UNIVERSITY, DIMAPUR is my original work prepared on individual effort based on the data provided by the Finance Department of Guwahati Refinery.

SHRUTI BUCHASHRUTI BUCHA

PGDM 3rd Semester

School Of Management Studies

Nagaland University


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EXECUTIVE SUMMARY

Project Title: To provide a brief overview of the organization and working of

Guwahati Refinery and determine the financial viability for installation of the New

Heat Exchanger In RFO (Reduced Fuel Oil) for Heat Recovery at Delayed Coking of

Guwahati Refinery.

Organization: Guwahati Refinery, Indian Oil Corporation Limited.

Organizational Guide: Mr Ritesh Agarwal, Mr. Saurabh Suman

Institution Guide: Mr Ditalak Mpanme Faculty SMS N.U

Duration of the project: 1ST June to 31ST July, 2011.

Objective of the study:

To provide a glimpse of Indian Oil Corporation Limited and of Guwahati Refinery.

To describe the functioning of each sections of the Finance Department of Guwahati Refinery

To determine the financial viability for installation of Heat Exchanger in RFO of Guwahati Refinery as an initiative towards CDM (Clean Development Mechanism) Projects.

Research Methodology:


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The Research carried out is a Descriptive study including mostly the secondary data. The data are analyzed using the various Capital Budgeting techniques. The data has been collected from the Finance and the Projects Department of Guwahati Refinery.

While analyzing the data with the help of various Capital Budgeting techniques we have tried to find out the worthwhileness of Heat Recovery at Delayed Coking Unit by installing a new Heat Exchanger in RFO (Reduced Fuel Oil) rundown circuit.

The selection rules associated with these criteria and the respective findings are as follows:

Chapter 1


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Criterion With CDM Without CDM

Payback Period PBP < Target Period2.63<15

PBP < Target Period2.83<15

Net Present Value(NPV)

NPV > 1 i.e Rs 88.11 > 1

NPV > 1 i.e Rs 77.1> 1

Profitability Index PI > 1 i.e 2.25 > 1

PI > 1i.e 2.09 > 1

Internal Rate of Return(IRR)

IRR > Cost Of Capital 36.68%>13%

IRR > Cost Of Capital33.98%>13%

Discounted payback Period

DPBP < Target period 3.50<15


Accounting Rate of Return(ARR)

ARR > Target RATE 27.47%>13%

ARR > Target rate 25.03%>13%

INTRODUCTION

Brief History of Oil industry in India

In 1881, Assam Railway & Trading co. began laying of tracks in Assam

They used elephants in place of cranesOne day, one of the elephants wandered away,to come back with its feet smeared by slimy oil

Backtracking led to the discovery of oilin Borbhil, near present day Digboi

A Canadian driller, Willey Leove holleredat native boys, “Dig boy dig”

Oil was struck and the name ‘Digboi’ stuck.

Digboi became the birth place of India’soil industry.


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In 1890s Crude Oil used to be distilled in DIGBOI in Cast Iron pans – called ‘Stills’. Bottom portion of one such still of 9 feet diameter is still kept at Digboi Refinery.

IndianOil Corporate History


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Beginning of Petroleum Refining in India.

In 1890s, crude oil distillated at Margherita, 16 km away from Digboi, in cast iron pans, called ‘Stills’

Digboi Refinery of Assam Oil Company (AOC) commissioned at its present location in 1901 with 500 bbl/day capacity.

AOC nationalised and its Refining and Marketing functions merged with IOC in October , 1981

Digboi refinery is one of the oldest refinery in the world that is still working

In 1960, Indian Oil Co. signed a historic agreement with Soviet Union for import of 1.5 MMT of SKO, HSD & ATF over a period of 4 years on ‘rupee payment basis’. This initiated the end of to the monopoly of foreign oil companies.

On 1st September 1964, as a step towards achieving improved efficiency, Indian Refineries & Indian Oil Co. were merged. Indian Oil Corporation Ltd.(IOC) was born.

INTRODUCTION OF

Indian Oil Corporation Limited:


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At the time of independence, India’s oil industry was fully controlled by

international oil cartel

In 1956, Industrial Policy Resolution was passed, which laid the foundation of national oil industry

The resolution stated – “Oil is of vast importance in the world today. A country that does not produce its own oil is in a weak position. From the point of view of defence, the absence of oil is a fatal weakness”.

Exploration & production was put into Schedule – ‘A’, meaning thereby that only state would operate in this field

Soon thereafter, ONGC was formed for oil exploration and drilling.

Indian Oil Refinineries were formed in1958 for refining and manufacturing of petroleum products, with shree Feroze Gandhi as its chairman.

This was followed by the formation of Indain Oil Co. in 1959, for marketing and distribution of petroleum products.

Date of Incorporation: 1st September 1964.

Type of Company:

Government Company under Section 617 of the Companies Act, 1956.

Administrative Minister:

Ministry of Petroleum & Natural Gas, Government of India.

Share Capital:

i)Authorised: Rs.2500.00croresii) Subscribed, issued & paid-up: Rs.1213.97 crores.

Details of Disinvestments:

The Govt. of India was holding the entire Paid- up Share Capital of the Company till 1994-95. The Govt. of India disinvested about 9% of its holding in the company in favor of Banks, Mutual funds, Financial Institutions and Employees of the Company during 1994-95. In the year 1999, the Govt. of India further disinvested 10% of its holding in the Company in favor of ONGC Ltd. which is a Govt. Company.

Share Holding Pattern as on 31st March 2011:


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Listing with Stock Exchange: The equity shares of the Company are presently listed with the following stock exchanges:-i) Bombay Stock Exchange (BSE) , Mumbaiii) The National Stock Exchange of India Ltd. (NSE).

INDIAN OIL CORPORATION LTD. (INDIAN OIL) WAS FORMED IN 1964 THROUGH THE MERGER OF INDIAN OIL COMPANY LTD. (EST. 1959) AND INDIAN REFINERIES LTD. (EST. 1958).


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President of India78.9%

ONGC8.8%

LIC2.9% MF/UTI

1.75%Ins Cos

3.5%

FIIs0.7% Individuals

3.0%

GoGuj0.1%

Others0.3%

It is currently India's largest company by sales. Indian Oil is also the highest ranked Indian company in the prestigious Fortune 'Global 500' listing, at 125th position. It is also the 20th largest petroleum company in the world. Indian Oil and its subsidiaries account for 46.9% petroleum products market share in the


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Beginning of Indian Oil Corporation Ltd.

Indian Oil Refineries Ltd.

19581958

Indian Oil Corporation

Ltd.

1st September1st September 19641964

Indian Oil Company Ltd. 19591959

MergerMerger

industry, 40.4% national refining capacity and 67% downstream sector pipelines capacity.

The Indian Oil Group of companies owns and operates 10 of India‘s 20 refineries with a combined refining capacity of 60.2 million tons per annum. These include one of the subsidiary refinery i.e. Chennai Petroleum Corporation Ltd. (CPCL). The Company‘s cross-country crude oil and product pipelines network spanning over 9,300 km meets the vital energy needs of the country.

The Indian Oil Corporation Ltd. operates pipelines and refines imported as well as indigenous crude oil and markets petroleum products. To maintain its competitive edge and leadership status, Indian Oil has invested Rs. 43,250 crore (US $10. 65 billion) during the XI Plan period (2007-12) in integration and diversification projects, besides refining and pipeline capacity augmentation, product quality upgradation and expansion of marketing infrastructure.

Indian Oil operates the largest and the widest network of petrol & diesel stations in the country, numbering around 16,455. It reaches Indane cooking gas to the doorsteps to over 46.4 million households in 2,709 markets through a network of 4,996 Indane distributors

Indian Oil's ISO-9002 certified Aviation Service commands a 63% market share in aviation fuel business, meeting the fuel needs of domestic and international flag carriers, private airlines and the Indian Defense Services. Indian Oil also enjoys a dominant share of the bulk consumer business, railways, and state transport undertakings, industrial, agricultural and marine sectors. Indian Oil's world class R&D Centre is perhaps Asia's finest. Besides pioneering work in lubricants formulation, refinery processes, pipeline transportation and alternative fuels such as bio-diesel, the Centre is also the nodal agency of the Indian hydrocarbon sector for ushering in Hydrogen fuel in the country. Indian Oil joined the league of global technology providers in 2006-07 with its in-house developed Indmax technology selected for the 4 MMTPA Fluidized Catalytic Cracking (FCC) unit at the Corporation‘s upcoming 15 MMTPA refinery-cum-petrochemicals complex at Para dip in Orissa, as well as for the FCC unit coming up at BRPL.


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LOCATION OF IOCL IN INDIA


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Vision, Mission, Values, Functions & Duties , Objectives & obligations :

Vision

A major diversified, transnational, integrated energy company, with national leadership and a strong environment conscience, playing a national role in oil security & public distribution

Mission: 1) To achieve international standards of excellence in all aspects of energy and

diversified business with focus on customer delight through value of products and services, and cost reduction.

2) To maximize creation of wealth, value and satisfaction for the stakeholders.

3) To attain leadership in developing, adopting and assimilating state-of- the-art technology for competitive advantage.

4) To provide technology and services through sustained Research and Development.


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5) To foster a culture of participation and innovation for employee growth and contribution.

VALUES- Values we nurture

Care - stands for Innovation - stands for

Concern Creativity Empathy Ability to learn

Understanding Flexibility

Cooperation Change

Empowerment

Passion - stands for Trust - stands for

Commitment Delivered Promise Dedication Reliability Inspiration Dependability Pride Integrity Ownership Truthfulness Zeal & Zest Transparency

Functions & duties

Indian Oil Corporation Ltd. has been established to carry out the objectives specified in the Memorandum & Articles of Association of the Company. The main activities of Indian Oil are refining, transporting and marketing of petroleum products.

Objectives:

1) To serve the national interests in oil and related sectors in accordance and consistent with Government policies.


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2) To enhance the country‘s self-sufficiency in crude oil refining and build expertise in laying of crude oil and petroleum product pipelines.

3) To create a strong research & development base in refinery processes, product formulations, pipeline transportation and alternative fuels with a view to minimizing/eliminating imports and to have next generation products.

4) To optimize utilisation of refining capacity and maximize distillate yield and gross refining margin.

5) To maximize utilisation of the existing facilities for improving efficiency and increasing productivity.

6) To avail of all viable opportunities, both national and global, arising out of the Government of India‘s policy of liberalization and reforms.

Obligations:

To provide prompt, courteous and efficient service and quality products at competitive prices:

1. Towards suppliers

To ensure prompt dealings with integrity, impartiality and courtesy and help promote ancillary industries.

2. Towards employees

To develop their capabilities and facilitate their advancement through appropriate training and career planning.

3. Towards community

To maintain the highest standards in respect of safety, environment protection and occupational health at all production units.

4. Towards Defence Services

To maintain adequate supplies to Defence and other para-military services during normal as well as emergency situations.


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Decision Making Process:

The decisions making process of IOCL follows the following Channel


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BOARD OF DIRECTORSBOARD OF DIRECTORS

CHAIRMAN CHAIRMAN

FUNCTIONAL DIRECTORS FUNCTIONAL DIRECTORS

EXECUTIVES EXECUTIVES

Overall management of the Company is vested with the Board of Directors of the Company. The Board of Directors is the highest decision making body within the Company.

As per the provisions of the Companies Act, 1956 certain matters require the approval of the shareholders of the Company in General Meeting.

The Board of Directors is accountable to the shareholders of the Company, which is the ultimate authority of a Company. Indian Oil being a Public Sector Enterprise (PSE),the Board of Directors of the Company is also accountable to Government of India.

The day-to-day management of the Company is entrusted on the Chairman and the Functional Directors and other Officers of the Company. The Board of Directors has delegated powers to the Chairman, Functional Directors, who have in turn delegated powers to the Executives of the Company through Delegation of Powers. The Chairman, Functional Directors and other officers exercise their decision-making powers as per this delegation of powers.

The Chairman, Functional Directors and other Executives are accountable to Board of Directors for proper discharge of their duties & responsibilities. The powers, which are not delegated, are exercised by the Board of Directors subject to the restrictions and provisions of the Companies Act, 1956.


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ORGANISATION SET-UP:

BOARD OF DIRECTORS


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BOARD OF DIRECTORS

Corporate Set-up Divisional Set-up

1. Finance

2. Human Resource

3. Planning & Business Development

1. Refineries(including AOD’s Digboi Refinery)

2. Pipelines

3. Marketing (including AOD’s Marketing)

4. R&D

Business of the Organization:

1. Refineries Division

IndianOil group of companies owns and operates 10 out of India’s 20 refineries with a combined refining capacity of 60.2 million tonnes per annum.

IndianOil refineries process all major indigenous crude oil plus over 36 types of imported crude oil, from which it produces more than 60 types of petroleum products, ranging from light distillates, such as LPG, naphtha and motor spirit, to heavy ends, such as furnace oil and low sulphur heavy stock. The flexibility of processing capability allows IndianOil to vary both its crude oil inputs and petroleum product outputs to achieve the company’s desired production mix. IndianOil refineries are fully equipped to meet the current environmental norms in relation to product specifications in the country and are being constantly modernized and upgraded to be able to meet all future environment regulatory requirements.


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Refineries HQ, New Delhi

Technical

Materials

Projects

Refineries

* Digboi (AOD)* Guwahati* Barauni* Gujarat* Haldia* Mathura* Panipat* Bongaigaon* CPCL* Nariman

HR

S & EP

FINANCE

M & I

2. Pipelines Division:


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Pipelines HO, NOIDA

Operations MATERIALS MAINTENANCE TECHNICAL

SERVICES

Projects

Northern Region MJPL (P)

PBPL (P)

MTPL (P)

PRPL (P)

PJPL

(LPG)

Eastern Region

GSPL (P)

BKPL (P)

HBPL(P)

HMRPL(P)

PHBPL (C)

Western Region

KAPL(P)

SMPL(C)

KSPL(P)

MPPL(C)

KNPL(P)

KDPL(P)

Southern Region

CTMPL (P)

Indian Oil Corporation owns and operates the largest network of crude oil and product pipelines in India. The total network of pipelines is more than 10,000 km with a capacity of 71.61 million metric tonnes per annum as on March 2009. IndianOil’s pipelines include 4366 kilometers of crude oil pipelines and 5964 kilometers of product pipelines. The company’s pipelines are well positioned to supply petroleum products from its refineries and India’s ports to high demand states in northwestern India.


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Panipat

Guwahati

Koyali

Haldia

Mathura

BarauniKanpur

Bhatinda

Kandla

Vadinar

Chaksu

Ahmedabad

Jalandhar

Jodhpur

BudgeBudge

Kot

Delhi

BongaigaonSiliguri

Meerut

Sidhpur

Digboi

Tinsukia

Chennai

Navagam

Tundla Lucknow

Sanganer

Maurigram

Rajbandh

Najibabad

RoorkeeAmbal

aSangru

r

Rewari

Ajmer

Chittaurgarh

Dahej

Sankari

Asanur

Trichy

Madurai

Paradip

Mundra

ProductCrude Oil

IOC’s Pipelines (Existing)

ProductCrude Oil

IOC’s Pipelines (Ongoing)

Ratlam

Pipelines

Dadri

R -LNG Pipeline

LPG Pipeline

IOC Pipelines

(As on21.1.2009)

Crude: 4366 KM

(38.2 MMTPA,

100%)

Product: 5698 KM

(31.408 MMTPA, 53%)

Total: 10064 KM

(69.608 MMTPA, 71.4%)

Downstream Industry Pipelines

(As on 21.1.2009)

Crude: 4366 KM

(38.2 MMTPA)

Product: 9866 KM

(59.28 MMTPA)

Total: 14232 KM

(97.483 MMTPA)

Bangaluru

IndianOil and its subsidiaries account for 47% petroleum products market share. The company distributes its products directly to bulk customers and to retail customers via a network of retail outlets and dealers/distributors.

The company’s overall distribution network encompasses over 35,000 sales points incorporating its own franchise as well as independent outlets, consumer pumps, distributors etc. the substantial majority of which are governed by dealership agreements. Products are transported to the distribution points by pipeline, ship tanker, rail tankers and road tanker trucks.


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3. Marketing Division

Marketing HO, Mumbai

4 Regional ServicesNorth/East/West/South

State Offices

AOD International Marketing &

Overseas Subsidiaries

AFSs

Div./Area OfficesDepots/terminals/BPs/SCFPs

Field Force

Established in 1972 for the development of lube as well as refining process technologies, the IndianOil R&D Centre at Faridabad has completed over 35 years of glorious service to the nation.Developing more than 2500 formulations over the years, it has successfully perfected the state-of-the-art lube formulation technology meeting latest national and international specifications with approvals from major original equipment manufacturers. IndianOil markets around 800 grades of lubricants under the brand name "SERVO" based on its own R&D technology and is one among the six worldwide technology holders of marine oil technology. It has extensive laboratory and pilot plant facilities to successfully pursue projects in lube, refining and pipeline areas making it a unique technology centre.

Its rich reservoir of highly qualified/ specialized scientific and technical manpower has elevated this centre to global status. The Centre has also taken the lead in the development and commercialisation of biodiesel.


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4. Research and Development

R&D Centre, Faridabad

Fuels &

Emission

Petrochem

& Biotech

Lube

Technology

Refining

Technology

Process DevelopmentProduct DevelopmentTransportation

StudiesProjects

Others

BRANDED PRODUCTS OF IOCL

DETAILS OF PRODUCTS


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INDIAN OIL

1. SERVO

SERVO is India's largest selling lubricant brand. SERVO ranges of lubricants enjoy approvals from major Original Equipment Manufacturers (OEMs) including new generation cars. 9,000 Retail Outlets and a countrywide network of SERVO SSls and SSAs Bazaar traders offer SERVO range of lubricants to customers.

The SERVO range of lubricants is used in almost every application covering automotive, industrial and marine sectors. SERVO has been designated as a SUPERBRAND.

Developed exclusively at Indian Oil's world-class R&D Centre at Faridabad, there is a SERVO lubricant for virtually every single application. With over 42% market share and 450 grades, the country's leading SERVO brand lubricants from Indian Oil are sold through over 8,100 Indian Oil petrol/diesel stations, over 1,300 SERVO Shops and a countrywide network of bazaar traders.

2. INDANE LPG

Indian Oil Indane LPG gas is used in 40 Million homes as cooking fuel and commands over 48% market share in India. Indane LPG as is marketed through a network of 4350 Indane distributors. Widely used in commercial sectors like industries, hotels & restaurants, medical labs, etc. 87 Indane Bottling Plants are spread across the country with a combined bottling capacity of 3.77 MMTPA. New and convenient 5 kg Indane LPG gas cylinders introduced in rural and hilly regions for wider use by economically weaker sections. Indian Oil's auto LPG brand Auto gas is the leader in the segment. Marketed through a network 48 stations out of an industry total of 103 Auto LPG Dispensing Stations.

3. Indian Oil AVIATION SERVICE


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Meets complete Aviation Fuel requirements of the Defence Services and for over 75 Domestic and International airlines besides private aircraft operators. Indian Oil Aviation Services is ISO 9002 certified and entrusted with WIP refueling for national and overseas dignitaries. Indian Oil's prompt, courteous and 'No-Delay'

Indian Oil Aviation Services has a market share of 65% with a network of 95 Aviation Fuel Stations (AFS). Indian Oil Aviation Services serves over 71 International airlines besides the domestic airlines in India. Between one sunrise and the next, Indian Oil refuels over 900 aircrafts.

. 4. AUTO GAS

Auto gas (LPG) has been introduced in Hyderabad, Bangalore and Mumbai markets. This alternative fuel is a good business proposition in the long term, and Indian Oil intends to further expand its marketing in a big way.

5.PREMIUM FUELS

Indian Oil offers Xtra Pemium Petrol and XtraMile Diesel, which are the best your vehicle can get. India's first 91 Octane petrol, XtraPremium is reinforced with multifunctional additives including 'Friction Buster'. Available at nearly 2000 Retail Outlets nationwide,

XtraPremium offers:

Super Mileage and Super Pick-up. Enhances cleaning of engines. Minimizes exhaust emissions.

XtraMile, Indian Oil's new generation High Speed Diesel with world-class additives has taken a leadership position in the market. Available at nearly 4400 Retail Outlets nationwide, XtraMile offers:

Extra mileage -Greater Acceleration. Longer engine life -Enhanced overall performance.


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Eliminates engine knockings

6. XTRA POWER

Indian Oil's Xtra Power Fleet Card Program is a complete fleet management solution for Fleet Owners / Operators and Corporates. Xtra Power is a Smart Card based Fleet Card Program, which facilitates cashless purchase of fuel & lubes from designated retail outlets of Indian Oil through flexible prepaid and credit facilities.

7. SWAGAT HIGHWAY OUTLET

To cater the high growth areas of National Highways forming a part of Golden Quadrilateral and N-S, E-W corridors, Indian Oil has launched Flagship Outlets, which have been branded as “Swagat” Retail Outlets.

Incentives available on fuel purchases in the form of loyalty points redeemable against fuel/lubes and other rewards.

8. XTRA CARE

The launch of Xtra Care was the culmination of a series of plans in retail design, product and service upgradation, capability training, automation, loyalty programme, retail site management techniques all benchmarked to global standards. While the industry standard is to take samples on a quarterly basis,

Indian Oil has moved several steps ahead by introducing fortnightly random sampling with specific importance given to RON (Research Octane Number) sampling which is truly the definitive test for quality and quantity.

The non-fuel services are being given a major fillip in the Indian Oil Xtra Care plan with a wide range of loyalty programme with –Xtra Rewards, Xtra Power and co-branded cards like Indian Oil-Citibank credit cards.

Indian Oil Refineries: Installed Capacities


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NOTE:

1. MMTPA – Million Metric Tonne Per Annum.

2. * Subsidiary of IOCL.

3. Indian Oil group of companies owns and operates 10 out of India’s 20

refineries with a combined refining capacity of 60.2(49.70-own capacity and

10.50-capacity of the subsidiary refineries) million metric tonnes per annum.

Another refinery is being set up on the East Coast at Paradip(Orissa) with a

capacity of 15.00 million metric tonnes per annum.

Major Petroleum Products


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S.NO. NAME OF THE COMPANY

LOCATION OF REFINERY

CAPACITY

(MMTPA)

1. IOCL GUWAHATI 1.00

2. IOCL BARAUNI 6.00

3. IOCL KOYALI 13.70

4. IOCL HALDIA 6.00

5. IOCL MATHURA 8.00

6. IOCL DIGBOI 0.65

7. IOCL PANIPAT 12.00

8. IOCL BRPL 2.35

9. IOCL *CPCL 09.50

10 IOCL *NARIMAN 1.0

TOTAL 6O.2

Products of the Refineries of IOCL:


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Liquified Petroleum Gas (LPG)

Naphtha

Motor Spirit (MS)/ Petrol/ Gasoline

Aviation Turbine Fuel (ATF)

Superior Kerosene Oil (SKO)

High Speed Diesel (HSD)

Light Diesel Oil (LDO)

Furnace oil (FO)

Heavy Petroleum Stock (HPS)

Lube oils

Raw Petroleum Coke (RPC)

Petroleum Wax

Bitumen/ Asphalt

Lightest

Heaviest

SWOT ANALYSIS:

INTERNAL ORIGIN

EXTERNAL ORIGIN

STRENGTH:

1) Dominant Foothold in Indian Market


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S

Strengths

W

weaknesses

O

Opportunities

T

Threats

2) IOCL has 10 Refineries under its Group having a combined.Throughput of 60

MMTPA which is the highest in India.

3) Vast Network of Petrol Pumps spread across all parts of India and IOC

occupies more than 60% of Market Share in Petroleum Products in India.

4) IOCL has downstream pipeline network of 10064 Km spread across India

which is 71.4% of Total Downstream Pipeline Network in India. Large

Network of Pipeline gives IOCL a competitive edge.

WEAKNESS:

1) Non Autonomy.

2) Most of IOCL Refineries are Inland Refineries which increases the cost of

Production.

3) Some of the Refineries Technology is old. They can only process Low Sulphur

Crude and efficiency is also low.

4) Since IOCL is a Public Sector Undertaking there is high Government

Regulation.

OPPORTUNITY:

1) Diversification into Renewable Energy.

2) Positive Outlook for Natural Gas Business.

3) Strengthening Petrochemical Operation.

4) Developing its own technology with emphasis on R & D units.

5) Company can integrate its core Business of Petroleum Products with

Exploration Activities.

6) Diversification oppurtunities are there in Gas Sector & Alternate Energy

Sectors such as Bio-Fuels and also in Power Sector.

THREATS:


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1. Highly Competitive Market

2. Environmental Regulations.

3. Volatile Oil and Gas Prices.

4. Rising Capital Costs in the Refining Sector

5. Prices regulated by Govt. for Four Major Products. i.e HSD, MS, SKO & LPG

6. Increasing International Crude Prices and Depleting Crude Oil Reserves.

7. Emergence of Private Player like Reliance/ESSAR with latest refining

technology having High Crude Throughput Installed Capacity and locational

advantages.

CHAPTER- 2

INTRODUCTION


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GUWAHATI REFINERY (NOONMATI)

What is a refinery? A refinery is a factory which takes a single raw material i.e. crude oil and transforms it into various useful products meeting stringent quality norms and dispatches it by various modes, as needed by the market.

The above task has to be accomplished – a) In the most cost effective way. b) Safely and without damaging the environment. c) Complying all statutory stipulations. d) Without any interruptions. e) Through a set of refining processes & operations

Guwahati Refinery, the first public sector refinery of the country, was built with Romanian collaboration at the cost of Rs 17.29 crores with a design capacity of 0.75 million metric tones per annum. The Guwahati Refinery was inaugurated by the first Prime Minister of India, Pandit Jawaharlal Nehru, on 1st January 1962.

The present capacity of Guwahati Refinery is 1.0 million metric tones per annum. The Guwahati Refinery is one of the largest production based organization in theEntire Northeast having 900 employees in total.

Guwahati Refinery is amongst those Indian Refineries who have been rewarded with ISO-9001 certification of International Quality Standards as well as ISO-14001, for Environment Management System and Occupational Health and Safety Management System (OSHMS) which is also a stringent International Standard which very few Indian Companies have achieved till date. Guwahati Refinery has been certified with International Safety Rating System (ISRS) level-6 certification by M/s DNV. These achievements show the deep commitment of Guwahati Refinery to Quality, Safety and Environmental Management System.

Guwahati Refinery came into operation in the year 1962 with an installed capacity to process 0.75 MTPA of Assam Crude. After debottling the operating process units, the total refining capacity was subsequently enhanced in first stage to 0.85 MMTPA and now to 1.0 MMTPA. The refinery process a mix of Oil (Oil India Limited) and ONGC (Oil & Natural Gasses Corporation Limited) crude received from Assam Oil fields through a 430 km long and 16-trunk pipeline.


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The Refinery has an elaborate pollution control system to ensure that water generated are adequately treated prior to discharge into the river Brahmaputra. More than 50 % of the treated effluent water is now reused in the refinery. Wide Range of Products:

With capacity of 1.0 MMTPA, Guwahati Refinery processes crude oil received from the upper Assam oil fields and caters to the requirement of the petroleum products of northeastern region. Its product slate includes LPG, Motor Spirit (MS), Kerosene, High Speed Diesel (HSD), Light Diesel Oil (LDO), Straight Run Naphtha (SRN), Raw Petroleum Coke (RPC), and a special cut naphtha (RN) which is used as a feed stock for CRU of Digboi Refinery of Assam Oil Division. Keeping pace with changes in Industrial Environment, Guwahati Refinery is diversifying to produce specialty products like

Premium MS & Needle coke etc. for gearing up the cleaner fuel requirements of the country in coming years.

A hydrotreater unit for improving the quality of diesel has been installed and was commissioned in 2002. The refinery has also installed in 2003 Indmax Unit, a novel technology developed by its R&D Centre for upgrading heavy ends LPG, motor spirit and diesel oil.

Guwahati Refinery is the first refinery in India to produce Needle Coke.

Guwahati refinery set up with the expertise and technical assistance. From the Romanian Government was initially designed to process 7,50,000 metric tones of crude oil p.a. & now has been upgraded to process 1.00 MMTA (million metric tones of crude per annum). The refinery process a mix of oil (Oil India Limited) and ONGC(Oil & Natural Gasses Corporation Limited) crude recived from Assam Oil fields through a 430 km long and 16- trunk pipeline.

Indian Oil commissioned India's first product pipeline, the Guwahati - Siliguri pipeline, in 1965. This 435-Km pipeline connecting Guwahati Refinery to different installations was designed to carry about 0.818 MMT of oil per year. As on 1st April 2003 Indian Oil operates the country's largest network of 7170 km of crude and product pipeline with a total capacity of 52.75 million metric tones per annum. Guwahati refinery got TPM certificate from Japan Institute of Plant Management.

A Brief on Manufacturing Process at Guwahati Refinery At Guwahati Refinery various petroleum products are produced by refining crude oil. The process involved in production of these products can be described under three basic steps: DISTILLATION, CRACKING and TREATING.


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1. Distillation The process of separating the components of a mixture by differences in boiling point; a vapor is formed from the liquid by heating the liquid in a vessel and successively collecting and condensing the vapors into liquids.

In refineries, distillation involves pumping oil through pipes in hot furnaces and separating light hydrocarbon molecules from heavy ones.

In Guwahati Refinery crude oil is distilled in one crude unit that operates at near atmospheric pressure (CDU).

During this process, the lightest materials, like propane and butane, vaporize and rise to the top of the atmospheric column. Medium weight materials, including gasoline, jet, kerosene and diesel fuels, condense in the middle. Heavy materials, called reduced crude oil condense in the lower portion of the atmospheric column.

2. Cracking The process of breaking down the larger, heavier and more complex hydrocarbon molecules into simpler and lighter molecules of higher value. Cracking is done by application of heat and pressure called as thermal cracking or pyrolysis and use of heat and catalytic agent called as catalytic cracking.

At Guwahati Refinery, thermal cracking is carried out in Delayed Coking Unit (DCU) wherein reduced crude oil (RCO) from CDU bottom is converted (using the coking, or thermal-cracking process) to high-value light products, producing petroleum coke in the process. The large residuum molecules are cracked into smaller molecules when the residuum is held in a coke drum at a high temperature for a period of time. Only solid coke remains and has to be drilled from the coke drums.

At Guwahati Refinery, catalytic cracking is carried out in INDMAX unit, which is a form of fluidized catalytic cracking wherein reduced crude oil (RCO) from CDU bottom & Coker Fuel oil (CFO) from DCU bottom is converted into value added products like LPG, Gasoline, LDO/HSD in presence of high temperature and catalyst.

3. Treating (Removing sulfur)In order to meet the environmental norms (BS-II /BS-III), the sulfur content of Gasoil has to reduce to acceptable norms. For this purpose, the Gasoil produced in Crude Units/DCU is treated in (Hydrotreater Unit) HDT unit where sulfur is reduced with the help of hydrogen.

Process Flow Diagram of Guwahati Refinery:


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LPG – LIQUID PETROLEUM GAS MS – MOTOR SPIRIT

HSD – HIGH SPEED DIESEL

SRN – STRAIGHT RUN NAPTHA

RPC – RAW PETROLEUM COKE

LDO – LIGHT DIESEL OIL

SKO – SUPER KEROSENE OIL

ATF – AVIATION TERVINE FUEL

CDU- CRUDE DISTILLATION UNIT

HGU – HYDRO TREATER UNIT

ATU – AMINE TREATING UNIT

DCU – DELAYED COKING UNIT

SRU – SULPHUR UNIT

CLO – CLARIFIED OIL

IFO – INTERNAL FUEL OIL

LN – LIGHT NAPHTA

SRK – STRAIGHT RUN KEROSENE

RCO – REDUCED CRUDE OIL

RFO – REDUCED FURNACE OIL

TCO – TOTAL CYCLE OIL

CK – COKER KERO CGO – COKER GAS OIL

CFO – COKER FURNACE OIL

SRGO - STRAIGHT RUN GAS OIL

HN – HIGH NAPTHA


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FUNCTIONS OF

EACH SECTIONS OF FINANCE DEPERTMENT

FINANCE DEPERTMENT OF GUWAHATI REFINERY

FINANCIAL MISSIONS

1. To provide high quality financial staff support for decision-making and

control to all levels of management—corporate, divisional, unit and location

to enable the achievement of overall corporate objectives and goals.

2. To play a lead role in scanning the domestic and international financial

environment, the formulation and implementation of all financial policies and

plans for different time spans consistent with and conducive to the business

plans for expansion, diversification, productivity etc.

3. To interact pro-actively with the relevant Government agencies on pricing

and investment and with financial institutions, depositors and creditors, with

sensitivity and promptness, for mobilization and provision of funds for

uninterrupted operations and project execution at optimal costs.

4. To maintain, review and update of all relevant accounting records, systems

and procedures for discharging the fiduciary responsibilities and enabling

compliance with statutory obligations.

5. To inculcate financial awareness, cost benefit attitudes and system

orientation in the entire organization.


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6. To develop the human resources, systems and techniques of finance for

continuing innovation and contribution towards IOC corporate excellence.

FINANCIAL OBJECTIVES

1. To ensure adequate return on capital employed and maintain a reasonable

annual dividend on its equity capital.

2. To ensure maximum economy in expenditure.

3. To generate sufficient internal resources for financing partly/wholly

expenditure on new capital projects.

4. To develop long term corporate plans to provide adequate growth of the

activities of the Corporation.

5. To continue to make an effort in bringing reduction in the cost of production

of petroleum products by means of systematic cost control measures.

6. The endeavour to complete all planned projects within stipulated time and

within stipulated cost estimates.

FINANCIAL GOALS

1. To inculcate cost consciousness in user departments.

2. Development of Standard Refining costs at each unit level.

3. Proper implementation of budgetary control and submission of MIS in time.

4. Ensure payment on due date to various agencies.


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5. Optimize utilization of working capital.

6. Efficient management of Funds.

THE FUNCTIONS OF THE FINANCE DEPARTMENT INCLUDES:

1. Management of financial resources for meeting the Corporations programmes

of operations and capital expenditure including investment of surplus fund, if

any.

2. Ensuring uniform financial and accounting policies and procedures, to the

extent possible, in the Division.

3. Establish and maintain a system of financial scrutiny and internal checks and

render advice on financial matters including examination of feasibility studies

and detailed project reports.

4. Establishment and maintain an appropriate system of Budgetary Control and

Management Information System for different levels of the Management.

5. Maintain the financial accounts, cost accounts and other relevant books and

records in accordance with the various statutory and other requirements.

6. Advise on corporate cash planning, credit policy and pricing policies of the

Corporation.

Ensuring that the Corporation acts in all financial and accounting matters as

per approved policies of the Corporation within the framework of Government

policy for public enterprises.

THE FUNCTIONING OF DIFFERENT SECTIONS OF THE FINANCE DEPARTMENT OF GUWAHATI REFINERY:


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1. MAIN ACCOUNTS:

The main accounts section is entrusted with the responsibility of the following:

a. Preparation of Balance sheet

b. Co-ordinator for all Audits i.e. Statutory, Government, CAG, Internal Audit,

etc.

c. Physical Asset verification.

d. Insurance of Assets and stocks.

e. Head Office Account Reconciliation.

Cash budget is prepared in this section and the same is to be produced before HO.

All other section of finance department provides the information to the Main

Accounts for preparing list “B”. List “B” details include 20 items approximately.

Some of them are mentioned below.

Employment and Housing accommodation statistics.

Payment of sales tax, Excise duty, Entry tax and other tax and duties.

Loss on disposal/write-off of –

(a) Assets

(b) Stores and spares showing original cost, book value and reason for disposal of

each item under various categories.

Asset management is also controlled by this section. For assets management, they

prepare the master of assets, which includes name, cost centre and other details

for capitalization of assets. Further, receiving debit, credit notes and reconciliation

of the is also a part of this section.

2. PURCHASE ACCOUNT:

Generally this section deals with the payment of purchase items only. After

purchase, the material is delivered to the stores department. The Stores

Department makes Goods Receipt Note (GRN) and sends it to the purchase

section. Here the GRN is checked with the purchase order (PO) and payment is

made through e-banking.

The purchases section is responsible for:

a. Scrutiny of purchase proposals.


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b. Deposit and advance payments to suppliers.

c. Passing of bill for supplies received.

d. Accounting of cash purchases made by the materials department.

e. Arrangement for insurance of goods in transit.

f. Maintenance of books of accounts.

3. PAYROLL:

This section mainly deals with the payment to employees for their work. Rules for

pay and allowance are prescribed by head office from time to time. The eligibility

for special type of allowance such as special allowances, shift allowance etc. is

determined by personnel department and intimations are sent to the finance

department giving the details of employees those who are eligible for such

allowance. Then the Pay Roll section functions accordingly.

Function dealing with this section can be broadly classified as:

a. Scrutiny & concurrence of proposals from personnel department.

b. Payment of salaries and allowances.

c. Advances payment to employees.

d. Deductions from pay bills.

e. Personal claims and other payments.

This section also maintains the data of transfer and new recruitment of employees

and adds it to master information. If a person is transferred to another unit, the

LPC (last pay certificate) is required to be added into master information.

4. STORES AND CENVAT:

MODVAT stands for Modified Value Added Tax, which is now known as CENVAT i.e.

Central Value Added Tax. It is a scheme, which provides relief to final

manufacturers on the excise duty borne by the suppliers in respect of goods

manufactured by them. Under this scheme, a manufacturer can take credit of

excise duty paid on raw materials and components used by them. The normal

excise duty rate is 16%. However it depends upon the Tariff class under which the

product is classified.

The section dealing with accounting of stores have the following functions:


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a. Passing and accounting of transportation bills.

b. Accounting of receipts, issues, return and transfer of materials.

c. Accounting of imported materials for capital works and operations/

maintenance.

d. Stock verification.

e. Accounting for sale of surplus/scrap materials.

5. PRODUCTION ACCOUNTING:

This section maintains production accounts, including crude accounting, custom

duty payments, product bill accounts, bitumen drum accounts and stock valuation

accounts. Production Accounts Section keeps records of input in terms of crude oil

and output in terms of the company’s final products.

The basic functions of the production accounts are:

a. Accounting of Crude oil quantity and value for the receipts, consumption and

stock.

b. Valuation of closing stocks i.e. Raw Material, ISD, Finished Goods

c. Preparation of Cost Sheet and Cost Audit Performa

d. Monitoring of Revenue Budget, Preparation of Revenue Budget.

6. CASH / BANK:

This section mainly deals with making payments. No fixed limit is established by

the organization for making payments. The organization has special current

accounts with State Bank of India. These accounts are the sources of payments.

The balance at the end of the day, becomes nil by transferring the amount to the

head office. The employees of the organization are paid through cash up to

Rs.20000 and by cheque for over and above Rs. 20000. Salary to the employees is

paid through cheques.

Cash section shall be responsible for:

a. Receipts of cheques and bank drafts

b. Payment of cheques and bank drafts.

c. Preparation of BRS (Bank Reconciliation Statement)

d. Safe custody of valuables and documents.


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7. PROVIDENT FUND & ADVANCES:

The scheme of the provident fund is the same as in case of any government

undertaking i.e. 12% of the dearness allowance is kept aside for this purpose and

the company contributes the same amount. All the employees irrespective of their

position in the organization are entitled to 9.5% interest on provident fund. This

rule is applied uniformly to all the units and branches of the refineries division of

Indian Oil Corporation limited.

8. OIL ACCOUNT

Here are some basic functions of the oil accounting:

a. Accounting of crude oil receipts

b. Accounting of customs duty on crude oil.

c. Accounting of finished product receipts

d. Dispatch of products.

e. Excise procedure and accounting

f. Material balance & Production statistics.

9. MISCELLANEOUS SECTION

The expense which cannot be accounted and beard by any other section is done

by this section.

The function of the Miscellaneous Section includes the following:

a. Accounting of cash imp rest and advances for company expenses for

specific reasons such as gift items for functions, urgent purchase etc.

b. Passing of bills of miscellaneous nature such as expenses of Auditor.

c. Miscellaneous recoveries from outsiders

d. Inter-sectional coordination.

e. Payment of Electricity Duty.

f. Payment for expenditure of Canteen and Training.


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IMPLEMENTATION OF ERP-SAP IN GUWAHATI REFINERY:

ERP-SAP has been implemented in Guwahati Refinery in 2002. This was the fourth

refinery to IOCL to go live in SAP after PRP, MR, and JR in the year 2002. All

modules viz FICO, PM, MM, HR, PS implemented and all transactions are done in

SAP.

FEATURES OF ERP-SAP

a) Covers the entire value chain/ supply chain, from customer requirement to

fulfillment.

b) Covers all business dimensions of the organization, process, people, structure

and technology.

c) Oriented towards business process and not around function.

d) Covers all management levels of the organization.

e) Fully integrated with all functionality of the organization.

GENERAL ADVANTAGES

a) Reduced working capital requirements.

b) Improved customer service and quality.

c) Reduced cost.

d) Having accountability through out the organization.


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e) Improved productivity and effectiveness.

MISCONCEPTIONS ABOUT SAP

a) ERP facilitates the decision-making and does not decide.

b) ERP provides comprehensive information to optimize but does not optimize

dynamically.

c) It automates and integrates transactions but does not target the cycle time

Since the system security is of utmost importance under SAP, user ID and Password is strictly enforced. Under SAP a complete Audit trial is maintained in the System. Therefore, the responsibility for any miss-happening is established as per the user ID to perform the relevant transactions.

Chapter 3

AIMS &OBJECTIVES, METHODOLOGY AND LIMITATION OF THE PROJECT

Any project work exposes the research scholar to the ground realities prevailing in the particular industry and thereby enables to carry out a meaningful realistic analysis.

The objectives of the project are as follows:-

a) To provide a glimpse of Indian Oil Corporation Limited and of Guwahati

Refinery.

b) To understand and describe the functioning of each sections of the Finance

Department of Guwahati Refinery.

c) To determine the financial viability for installation of Heat Exchanger in RFO

(reduced fuel oil) rundown circuit of Guwahati Refinery leading to reduce the

energy consumption.

RESEARCH METHODOLOGY


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The data collection is carried out mainly through personal interviews as well

as through the literature review from the relevant policy manuals as well as from

the various daily reports made by the Finance Department.

SOURCES OF DATA:

For collecting necessary data two sources have been used. They are

primary data & secondary data.

a) PRIMARY DATA:

Face to face discussion with the Finance Manager, Training Department

personnel, Finance Department Personnel and the employees of Guwahati Refinery

(a unit of IOCL).

b) SECONDARY DATA :

1. Data provided from the finance dept. regarding Cost of Investment, Cost of

Capital and other related information.

2. Journals and magazines published by I.O.C. Ltd.

3. Library: records and manuals.

4. Also through Company websites i.e.

www.iocl.com

DATA ANALYSIS: The Research carried out is a Descriptive study including

mostly the secondary data. The data are analyzed using the various Capital

Budgeting techniques.

The selection rules associated with these criteria are as follows:


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Based on the above mentioned selection rules, after analyzing the data collected

from various sources we can conclude that the project is worthwhile for the

organization and can be implemented.

LIMITATIONS:

The limitations of this study are as follows:-

a) The primary data collected through direct interaction with Officers of different departments are assumed to be correct as there is no provision to cross-check and verify the data.

b) Due to limited knowledge on the technical ground, some technical things and terms are taken for granted, viz. the benefits related to coalescer assembly.

c) In this project we are mainly concerned with the Financial Analysis part for installation of heat exchanger.

d) The scope of the study is limited to the vicinity of Guwahati Refinery

e) Time taken to complete the project work is very limited.


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CRITERION ACCEPT REJECT

NET PRESENT VALUE

(NPV)

NPV>1 NPV<1

INTERNAL RATE OF

RETURN (IRR)

IRR> COST OF CAPITAL IRR< COST OF CAPITAL

PAYBACK PERIOD (PBP) PBP< TARGET PERIOD PBP>TARGET PERIOD

DISCOUNTED PAYBACK

PERIOD

(DPBP)

DPBP<TARGETPERIOD DPBP>TARGETPERIOD

ACCOUNTING RATE OF

RETURN (A.R.R)

ARR>TARGET PERIOD ARR<TARGET PERIOD

CHAPTER -4

INTRODUCTION TO BUDGET & CAPITAL BUDGET

BUDGET

Budget is a pre determined statement of management policy during a given period which provides a standard for comparison with the result actually achieved.

In other words, A budget is the monetary or / and quantitative expression of business plans & policies to be pursued in the future period of time.

According to CIMA, Official terminology, “A budget is a financial and/or quantitative statement prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective”.

TYPES OF PLAN/BUDGET

The corporate objective forms the basis for long term and short term budget as to attain the desired objectives:

The long term plan comprises of:


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1. Perspective plan covering a duration of 10-15 years

2. Long range plan covering a duration of 5 years.

1. PERSPECTIVE PLAN:

The Perspective plan sets the long term goals to be attained by the corporation in line with the corporate objectives. The corporate goals are further divided into Divisional goals and Units’ goals. The perspective plan is updated once in two years so that at any point of time, perspective for a period of 10 –15 years is available. The perspective plan is prepared by corporate planning department based on inputs received from the divisions.

2. LONG RANGE PLAN:

Long range plan is aimed to achieve the broad objective envisaged in the perspective plan by fixing specific targets and action plans for various functions. The long range plan is co ordinate by the long range planning department at all Units and HO and the same is updated every year so as to have detail plans for five years at any point of time. The target/ goals set in the long range plan is reviewed periodically at Units/HO with reference to actual; performance.

SHORT TERM BUDGETS:

In the short term, the corporation prepares REVENUE and CAPITAL BUDGET indicating the revised estimates for the current year and the Budget Estimates for the next year.These budgets are more detailed and indicate the expected physical/financial performance of operations and projects for close monitoring and control.

SHORT TERM BUDGET

REVENUE BUDGET :

The revenue budget is basically a budget of income and expenditure.

CAPITAL BUDGET:


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REVENUE BUDGET CAPITAL BUDGET

Capital budgeting is the process of making investment decisions in capital expenditures. A capital expenditure may be defined as an expenditure the benefits of which are expected to be received over period of time exceeding one year. The main characteristic of a capital expenditure is that the expenditure is incurred at one point of time whereas benefits of the expenditure are realized at different points of time in future.

In other words, capital expenditure is an expenditure incurred for acquiring or improving the fixed assets, the benefits of which are expected to be received over a number of years in future. The following are some of the examples of capital expenditure:

Cost of acquisition of permanent assets as land and building, plant and machinery, goodwill, etc.

Cost of addition, expansion, improvement or alteration in the fixed assets.

Cost of replacement of permanent assets.

Research and development project cost, etc.

G.C. Philippatos has defined capital budgeting as,” Capital budgeting is concerned with the allocation of the firm’s scarce financial resources among the available market opportunities.

NEED AND IMPORTANCE OF CAPITAL BUDGETING:

The importance of capital budgeting can be well understood from the fact that an unsound investment decision may prove to be fatal to the very existence of the concern. The need, significance oor importance of capital budgeting arises mainly due to the following:

I. LARGE INVESTMENTS : capital budgeting decisions, generally, involve large investment of funds. But the funds available with the firm are always limited and the demand for funds far exceeds the resources. Hence, it is very important for a firm to plan and control its capital expenditure.

II. LONG-TERM INVESTMENTS COMMITMENT OF FUNDS: capital expenditure involves not only large amount of funds for long term or more or less on permanent basis. The long term commitment of funds increases the financial risk involved in the investment decision. Greater the risk involved, greater is the need for careful planning of capital expenditure, i.e. Capital Budgeting.


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III. IRREVERSIBLE NATURE: the capital expenditure decisions are of irreversible nature. Once the decision for acquiring a permanent asset is taken, it becomes very difficult to dispose of these assets without incurring heavy losses.

IV. DIFFICULTIES OF INVESTMENT PROPOSAL: the long term investment decisions are difficult to be taken because:

a. Decision extends to a series of years beyond the current accounting period,

b. Uncertainties of future, and

c. Higher degree of risk.

vi. NATIONAL IMPORTANCE: investment decision though taken by individual concern is of national importance because it determines employment, economic activities and economic growth.

Thus, without using capital budgeting techniques a firm involve itself in a losing project. Proper timing of purchase, replacement, expansion and alteration of assets is essential.

CAPITAL BUDGETING PROCESS:

Capital budgeting is a complex process as it involves decision relating to the investment of current funds for the benefit to the achieved in future and the future is always uncertain. However, the following procedure may be adopted in the process of capital budgeting:

i. INDENTIFICATION OF INVESTMENT PROPOSALS:

The capital budgeting process begins with the identification of investment proposals. The proposal or the idea about potential investment opportunities may originate from the top management or may come from the rank and file worker of any department or from any officer of the organization. The departmental head analyses the various proposals in the light of the corporate strategies and submits the suitable proposals in the light of the corporate strategies and submits the suitable proposals to the Capital Expenditure Planning Committee in case of large organization or to the officers concerned with the process of long term investment decision.

ii. SCREENING THE PROPOSALS: The Expenditure Planning Committee screens the various proposals received from different departments. The


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committee views these proposals from various angles to ensure that these are in accordance with the corporate strategies or selection criterion of the firm and also do not lead to departmental imbalances.

iii. Evaluation of various proposals: the next step in the capital budgeting process is to evaluate the profitability of various proposals. There are many methods which may be used for this purpose such as payback period method, rate of return of return method, net present value method, internal rate of rate return method, etc.

iv. Fixing priorities: after evaluating various proposals, the unprofitable or uneconomic proposals may be rejected straight away. But it may not be possible for the firm to invest immediately in all the acceptable proposals and to establish due to limitation of funds. Hence, it is very essential to rank the various proposals and to establish priorities after considering urgency, risk and profitability involved therein.

v. FINAL APPROVAL AND PREPARATION OF CAPITAL EXPENDITURE BUDGET: proposals meeting the evaluation and other criteria are finally approved to be included in the Capital Expenditure Budget. However, proposals involving smaller investment may be decided at the lower levels for expenditure action. The capital expenditure budget lays down the amount of estimated expenditure to be incurred on fixed assets during the budget period.

vi. IMPLEMENTING PROPOSAL: preparation of a capital expenditure budgeting & incorporation of a particular proposal in the budget does not itself authorize to go ahead with the implementation of the project. A request for the authority to spend the amount should further be made to the Capital Expenditure committee which may like to review the profitability of the project in the changed circumstances.

vii. PERFORMANCE REVIEW: the last stage in the process of capital budgeting is the evaluation of the performance of the project. The evaluation is made through comparison of actual expenditure on the project with the budgeted one, and also by comparing the actual return from the investment with the anticipated return. The unfavorable variances, if any should be looked into and the causes of the same are identified so that corrective action may be taken in future.


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IDENTIFY INVESTMENT PROPOSAL

FIG: CAPITAL BUDGETING PROCESS

Investment Evaluation Techniques Used In This Project:

At each point of time a business firm has a number of proposals regarding various projects in which it can invest funds. But the funds available with the firm are always limited and it is not possible to invest funds in all the proposals at a time. Hence, it is very essential to select from amongst the various competing proposals, those which give the highest benefits.

There are many considerations, economics well as non-economic, which influence the capital budgeting decisions.

The crucial factor that influences the capital budgeting decision is the profitability of the prospective investment. Yet, the risk involved in the proposal cannot be ignored because profitability and risk are directly related, i.e. higher the profitability, the greater the risk and vice versa.

There are many methods of evaluating profitability of capital investment proposals. The various commonly used methods are as follows:


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SCREEN PROPOSAL

EVALUATE VARIOUS PROPOSAL

FIX PRIORITIES

FINAL APPROVAL

IMPLEMENT THE PROPOSALS

REVIEW PERFORMANCE

(A) TRADITIONAL METHODS/ NON DISCOUNTED CASH FLOW:

I. PAYBACK PERIOD METHOD,

II. DISCOUNTED PAYBACK PERIOD METHOD,

III. ACCOUNTING RATE RETURN METHOD.

(B) TIME –ADJUSTED METHOD OR DISCOUNTED METHODS:

I. NET PRESENT VALUE METHOD,

II. INTERNAL RATE OF RETURN METHOD,

III. PROFITABILITY INDEX METHOD.

I. PAYBACK PERIOD METHOD:

Pay Back period is the exact amount of time required for a firm to recover its initial investment in a project as calculated from cash inflows.

This method is based on the principle that every capital expenditure pays itself back within a certain period out of the additional earnings generated from the capital assets.

Calculation of payback period:

(1) Calculate annual net earnings (profits) before depreciation and after taxes; these are called annual cash inflows.

(2) Where annual cash inflow is uniform, the initial outlay of the

project is divided by the annual cash inflow. The resultant figure is the

payback period.

PBP = Initial Cash outlays


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Annual Cash inflow

(3) Where the annual cash inflow are unequal, the payback period

can be found by adding up the cash inflows until the total is equal to

the initial cash outlay of the project.

Accept / Reject criterion:In case of evaluation of a single project, it is adopted if it pays back for itself within a period specified by the management and if the project does not payback itself within the period specified by the management then it is rejected.

PROS:

a) It is simple to understand and easy to calculate.

b) This method is particularly suited to a firm which has shortage of cash or whose liquidity position is not particularly good.

c) It is suitable in conditions of uncertainty. CONS:

a) It does not take into account cash inflows earned after the pay back period & hence the true profitability of the projects cannot be correctly assessed.

b) It ignores the time value of money and does not consider the magnitude and timing of cash in flows.

c) It does not take into consideration the cost of capital which is a very important factor in making sound investment decisions.

Although popular the payback period is generally viewed as unsophisticated capital budgeting technique, because it does not explicitly consider the time value of money.

II. DISCOUNTED PAYBACK PERIOD METHOD:

A major shortcoming of the conventional payback period method is that it does not take into account the time value of money. To overcome this limitation, the discounted payback period is used. In this modified method the present values of all cash outflows and inflows are computed at an appropriate discount rate. The present values of all inflows are cumulated in order of time. The time period at which the cumulated present value of cash inflows equals the present value of cash outflows is known as discounted pay-back period.


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Decision criterion:

The project which gives a shorter discounted pay-back period is accepted.

III. ACCOUNTING RATE OF RETURN METHOD / RATE OF RETURN METHOD:

This method takes into account the earnings expected from the investment over their whole life. Under this method, the Accounting concept of profit (net profit after tax and depreciation) is used rather than cash inflows.

According to this method, various projects are ranked in order of the rate of earnings or rate of return.

ARR = Average Annual Income After Tax & Depreciation x 100

Initial Investment

Decision Criterion:

The project with the higher rate of return is selected as compared to the one with lower rate of return. The expected return is determined and the project which has a higher rate of return than the minimum rate specified by the firm, is accepted and the one which gives a lower expected rate of return than the minimum rate is rejected.

PROS:

a) It is very simple to understand and use.

b) This method takes into account saving over the entire economic life of the project. Therefore, it provides a better means of comparison of project than the pay back period.

c) This method through the concept of "net earnings" ensures a compensation of expected profitability of the projects.

CONS:

a) It ignores time value of money.

b) It does not consider the length of life of the projects.

c) It ignores the fact that the profits earned can be reinvested.

B. TIME –ADJUSTED METHOD OR DISCOUNTED METHODS:


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Time adjusted technique is an improvement over pay back method and ARR. An investment is essentially out flow of funds aiming at fair percentage of return in future. The presence of time as a factor in investment is fundamental for the purpose of evaluating investment. Time is a crucial factor, because, the real value of money fluctuates over a period of time. A rupee received today has more value than a rupee received tomorrow. In evaluating investment projects it is important to consider the timing of returns on investment. Discounted cash flow technique takes into account both the interest factor and the return after the payback 'period.

Discounted cash flow technique involves the following steps:

Calculation of cash inflow and out flows over the entire life of the asset.

Discounting the cash flows by a discount factor

Aggregating the discounted cash inflows and comparing the total so obtained with the discounted out flows.

I. NET PRESENT VALUE METHOD:

This method recognizes the impact of time value of money. It is considered as the best method of evaluating the capital investment proposal.

It recognizes the fact that a rupee earned today is worth more than the same rupee earned tomorrow. The net present values of all inflows and outflows of cash occurring during the entire life of the project is determined separately for each year by discounting these flows by the firm’s cost of capital or a predetermined rate.

Method of calculation of N.P.V

1) Determine an appropriate rate of interest that should be selected as the minimum required rate of return called “cut – off rate or discount rate”. The discount rate should be either the actual rate of interest in the market on long-term loans or it should reflect the opportunity cost of capital of the investor.

2) Present value of the total investment outlays is to be computed.

3) Present value of cash inflows during the entire life of the project at the discounted rate is to be calculated.


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4) Calculate the net present value of each project by subtracting the present value of cash outflows for each project.

5) If the N.P.V is positive or zero, i.e. when P.V. of cash inflows either exceeds or is equal to the P.V. of cash outflows, the proposal may be accepted. But in case the present value of inflows is less than of cash outflows, the proposal should be rejected.

The P.V of Re. 1 due in any number of years can be found with the use of the following mathematical formula:

P.V. = 1

(1+r) n

Where,

P.V. = Present Value

r = rate of interest/ discount rate

n = number of years.

The P.V for all the cash inflows for a no. of years is thus found as follows:

P.V. = A1 + A2 + A3 +...… + An

(1+r) (1+r)2 (1+r)3 (1+ r)n

A1, A2, A3, AN = Future net cash flows (profit after tax but before depreciation)

r = rate of interest

2, 3,………., and n = number of years.

Thus,

NPV = PV of cash inflows – cash outlay

THE DECISION CRITERIA:

If NPV is greater than 1, accept the projectIf NPV is less than 1, reject the projectIf NPV is equal to 1, indifferentPROS:

a) It recognizes the time value of money.


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b) It considers the cash inflow of the entire project.

c) It estimates the present value of their cash inflows by using a discount rate equal to the cost of capital.

CONS:

a) It is more involved and complicated as compared to the Average Rate of Return or Payback methods.

b) The decision on the desired rate of return is crucial for evaluation by this

method, and in a dynamic situation where the desired rate can vary

frequently due to inflation and risk factors‘, deciding on a desired rate for the

duration of the project life poses problems.

c) It may not give reliable answers when dealing with alternative projects under the conditions of unequal lives of project.

II. INTERNAL RATE OF RETURN METHOD:

It is that rate at which the sum of discounted cash inflows equals the sum of discounted cash outflows. It is the rate at which the net present value of the investment is zero.

It is the rate of discount which reduces the NPV of an investment to zero. It is called internal rate because it depends mainly on the outlay and proceeds associated with the project and not on any rate determined outside the investment.

In this case, cash flows are discounted at a suitable rate by hit and trial method,

which equates the net present value so calculated to the amount of investment.

IRR = Lower Discount Rate + (Higher Discount Rate

– Lower Discount Rate)

The Decision Criteria


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When IRR is used to make accept-reject decisions, the decision criteria are as follows:

If the IRR is less than the cost of capital, reject the project.

If the IRR is greater than the cost of capital, accept the project.

If the IRR is equal to the cost of capital, indifferent.

PROS:

a) It consider the time value of money

b) Calculation of cost of capital is not a prerequisite for adopting IRR

c) IRR attempts to find the maximum rate of interest at which funds invested in

the project could be repaid out of the cash inflows arising from the project.

d) It considers cash inflows throughout the life of the project.

CONS:

a) Computation of IRR is tedious and difficult to understand.

b) It produces multiple rates which can be confusing. This situation arises in

case of non conventional projects.

c) It assumes that all proceeds are reinvested at the particular internal rate of

return for the remaining life of the project. But this assumption is not correct

if the average rate of return earned by the firm is not close to the internal

rate of return.

d) The results of NPV & IRR method may differ when the projects under evaluation differ in their size, life and timings of cash flows.

III. PROFITABILITY INDEX METHOD.

Profitability Index (PI) is the ratio of the present value of cash inflows, at the

required rate of return, to the initial cash outflow of the investment. It focuses

attention on the ratio of benefits expected of the project to its costs of investment

and operations, and thus looks at the profitability rather than the absolute


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quantum of profit. It is an extension of the net present value approach to compare

the profitability of investment alternatives before deciding on investment.

Profitability Index = Present Value of Cash Inflows

Present Value of Cash Outflows

Net Profitability Index = Net Present Value

Initial Cash Outlay

THE DECISION CRITERIA:

When PI is used to make accept-reject decisions, the decision criteria are as follows:

If the PI is greater than 1, accept the project.

If the PI is less than 1, reject the project.

If the PI is equal to 1, indifferent

PRONS:

It can be correctly used for ranking of the projects when the project involve

different amount of investments.

Since the benefit-cost ratio indicates relative and not absolute measure of

profits, it is considered superior to the Net Present Value method.

CONS:

When a package of smaller projects is to be considered in relation to a larger

project, the Profitability Index approach is of no help.

It is more involved and complicated as compared to the Average Rate of Return or Payback methods.

LIMITATIONS OF CAPITAL BUDGETING: Capital budgeting techniques suffer from the following limitations:


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I. All the techniques of capital budgeting presume that various investment proposals under consideration are mutually exclusive which may not practically be true in some particular circumstances.

II. The techniques of capital budgeting require estimation of future cash inflows & outflows. The future is always uncertain & the data collected for future may not be exact. Obviously the results based upon wrong data may not be good.

III. Urgency is another limitation in the evaluation of capital investment decisions.

IV. Uncertainty & risk pose the biggest limitation to the techniques of capital budgeting.

Step 1:Calculation of cash outflow


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Cost of project/asset xxxx

Transportation/installation charges xxxx

Working capital xxxx

Cash outflow xxxx

Step 2: Calculation of cash inflow

Sales xxxx

Less: Cash expenses xxxx

PBDT xxxx

Less: Depreciation xxxx

PBT xxxx

less: Tax xxxx

PAT xxxx

Add: Depreciation xxxx

Cash inflow p.a xxxx

Chapter 5

INTRODUCTION OF PROJECT:

NAME OF THE PROPOSAL:

Heat Recovery at Delayed Coking Unit by installing a new Heat Exchanger in RFO (Reduced Fuel Oil) rundown circuit.


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1. BRIEF DESCRIPTION:

Delayed Coking Unit (DCU) of Guwahati Refinery was installed with Rumanian Technology with a capacity of 0.33 MMTPA. Heat integration of the unit was done by M/s Kinetic Technology of India (KTI) with installation of New Charge Heater (03F101) and feed preheat exchanger trains. But, heat integration of Reduced Fuel Oil (RFO) was not addressed during the said revamp. Opportunity exists in RFO circuit to recover heat by integrating with generation of MPS in the existing system. Further, Delayed Coking Unit of Guwahati Refinery has been identified in Benchmarking Study conducted among all PSU refineries by M/s Shell Global Solutions at the request of MoP&NG. As per Benchmarking report 2008, DCU is operating with higher Energy Index, which signifies that the unit consumes more energy than theoretical/ benchmark energy figure of DCU of similar capacity and has recommended to explore possibility of heat integration to improve energy Index.

In light of above, this is a proposal to install a new exchanger in DCU to recover additional heat from rundown stream. This recoverable heat energy, equivalent to 175 SRFT, is presently being rejected in Cooling Water System and thus being wasted. The proposed exchanger is Reduced Fuel Oil (RFO) Vs Boiler Feed Water (BFW) leading to increase in MP steam generation in Steam Generator section due to increased BFW inlet temperature.

What is Clean Development Mechanism ?

The Clean Development Mechanism (CDM) is one of the "flexibility" mechanisms defined in the Kyoto Protocol (IPCC, 2007). It is defined in Article 12 of the Protocol, and is intended to meet two objectives: (1) to assist parties not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of the United Nations Framework Convention on Climate Change (UNFCCC), which is to prevent dangerous climate change; and (2) to assist parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments (greenhouse gas (GHG) emission caps). "Annex I" parties are those countries that are listed in Annex I of the treaty, and are the industrialized countries.


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http://en.wikipedia.org/wiki/Greenhouse_gas

http://en.wikipedia.org/wiki/Climate_change

http://en.wikipedia.org/wiki/United_Nations_Framework_Convention_on_Climate_Change

http://en.wikipedia.org/wiki/United_Nations_Framework_Convention_on_Climate_Change

http://en.wikipedia.org/wiki/Sustainable_development

http://en.wikipedia.org/wiki/Kyoto_Protocol

http://en.wikipedia.org/wiki/Flexibility_mechanisms

http://en.wikipedia.org/wiki/Flexibility_mechanisms

The CDM allows industrialized countries to invest in emission reductions wherever it is cheapest globally through renewable energy, energy efficiency, and fuel switching. An industrialised country that wishes to get credits from a CDM project must obtain the consent of the developing country hosting the project that the project will contribute to sustainable development.

Crediting mechanisms like the CDM could play three important roles in reducing the amount of (mitigating) future climate change:

Improve the cost-effectiveness of GHG mitigation policies in developed countries.

Help to reduce "leakage" (carbon leakage) of emissions from developed to developing countries.

Boost transfers of clean, less polluting technologies to developing countries.

2. COST ESTIMATE : Rs. 70.7 Lakhs- Price used are based on which year : 2010-11

- % of escalation amount : N/A

- % of custom duty : N/A

Budgetary cost estimate of exchanger contingency @ 10%. Datasheet of the proposed exchanger was sent to a Heat Exchanger vendor M/s Ozone Engineers, Kolkata. The party conducted the detailed thermal design of the heat exchanger and has submitted their budgetary offer for basic price of Rs. 9.58Lakhs for design, fabrication, testing ,commissioning and supply of the exchangers.

The total cost estimate including the additional expenses for piping, fittings, instruments and cost of execution works out to Rs.63.1Lakhs. Based on cost estimation of Engineering Services the total cost estimation of Heat Exchanger installation has worked out to be Rs 70.7 Lakhs .

3. JUSTIFICATION OF THE PROPOSAL:


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http://en.wikipedia.org/wiki/Carbon_leakage

http://en.wikipedia.org/wiki/Climate_change_mitigation

The envisaged energy saving potential of this process scheme is equivalent to 175 SRFT. Considering SRF price of Rs. 18354/MT, similar to that of LSHS price of MoU 10-11, this translates in additional Gross Refinery Margin (GRM) of Rs.32.10 Lakhs/Annum.

With total investment cost of Rs. 70.7 lakhs, simple payback for the proposed AF project would be mere 2.83 years (without CDM) and 2.63 years (with CDM). Reduction of 175 SRFT of fuel in boilers will lead to reduction of 567 MT of CO2 emission to the atmosphere translating to equivalent Carbon Emission Reduction (CER) of 567MT. This would provide an additional benefit of Rs. 2.55lakhs under CDM as it qualifies under technological barrier.

4. ADVANTAGES :

The increased heat recovery in the unit, due to installation of the new exchanger, would result in increased Medium Pressure generation from steam generator. This would reduce the energy consumption and hence the Energy Index of DCU.

The investment cost would be recovered in only 2.83 years and the installed heat exchanger would continue to yield recurring benefit.

ALTERNATIVE OPTION CONSIDERED, IF ANY: No.

CONSEQUENCE (ON PRODUCTION/ PROFIT/ EFFICIENCY ETC.,) IN CASE THE PROPOSAL IS NOT ACCEPTED :

i) LOSS OF PRODUCTION : No ii) LOSS OF PROFIT : Yesiii) LOSS OF EFFICIENCY : Yesiv) OTHERS (PLEASE SPECIFY) : Opportunity to maximize MPS

production ex DCU.

5. TECHNICAL FEASIBILITY :


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a) EFFECT OF ENVIRONMENT, IF ANY : None b) TECHNICAL CONSTRAINTS, IF ANY : None

6. IMPACT OF PROPOSAL OF MAN POWER :

a) WHETHER ADDITIONAL MANPOWER IS REQUIRED FOR RUNNING THE FACILITY. IF YES, PLEASE FURNISH THE DETAILS IN THE FORM OF AN ANNEXURE: No b) IF ADDITIONAL MANPOWER IS REQUIRED, HOW THE SCHEME WILL BE MANNED : Noc) WILL THE PROPOSAL RESULT IN SAVING MANPOWER FOR DEVELOPMENT IN OTHER JOBS : No

7. OPERATIONING AND MAINTENANCE COST :

Power, Fuel & Utility cost : Nil

Salary & allowance : Nil

Repair & Maintenance cost : Rs. 0.9 Lakhs

(Considering 1.25% of Investment Cost)

Overheads & Insurance : Rs. 0.29 Lakhs

(Considering 0.4 % of Investment Cost)

Total Net Operating cost : Rs 1.19 Lakhs

8. REQUIREMENT OF ADDITIONAL WORKING CAPITAL, IF ANY : NIL(DETAILS TO BE ATTACHED)

9. ECONOMICS:


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a) PAY BACK PERIOD : 2.63 Years (With CDM)

2.83 Years (Without CDM)

b) INTERNAL RATE OF RETURN : 36.68% (With CDM) 33.98% (Without CDM)

c) ANY OTHER CRITERIA USED: ARR, NPV, PI, Discounted payback period.

(refer to below)

10. PHASING OF EXPENDITURE :

YEAR Rs.in Lakhs

2012 70.7 Lakh (100 % of total investment)

11. APPROVAL:In view of the foregoing condition, for additional heat recovery in DCU, it is proposed to procure a new heat exchanger as per attached process datasheet, information and install the same in the unit as per attached process scheme

12. COMPLETION SCHEDULE: By May 2012A detail of completion schedule is enclosed as Annexure-III

IRR CALCULATION OF RFO EXCHANGER SYSTEM AT GR (WITH CDM)

RS.LAKHS

1 LAND P&M CIVIL TOTAL

PROJECT COST (PCWOFC) 0.00 68.7 2.00 70.7

FINANCIAL COST 0.00 0.00 0.00 0.00

0.00 68.7 2.00 70.7


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2

PHASING (PCWFC) 0TH YEAR 1 ST YEAR 2 ND YEAR TOTAL

70.7 0.00 0.00 70.7

3

OPERATING COST RS. LAKHS

-REPAIR &MAINTENANCE @1.25% 0.9

-INSURANCE @ 0.4% 0.29 1.19

4

REALISATION

Delta products Product prices Freight under recovery ED benefits Products

Rs/MT Rs/MT Rs/MT Rs/MT MT / CER RS LAKHS

FUEL OIL 18354 0.00 0.00 175 32.10

CDM 449.44 0.00 0.00 567 2.55


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TOTAL 34.65

GROSS PROFIT = (34.65 – 1.19) LAKHS

= 33.46 LAKHS

Calculations with CDM

Year

Gross

Profit

Written

Down Value

Depreciation

Profit Before

Tax

Income Tax

PAT Cash Flow

Disc Factor @13%

PV Of Cash Flows

1 33.46 70.7 24.75 8.712.89

5.82 30.57

0.885 27.05

2 33.46 45.96 6.89 26.57 8.83 17.74

24.63

0.783 19.29

3 33.46 39.06 5.86 27.6 9.17 18.43

24.29

0.693 16.83

4 33.46 33.2 4.98 28.48 9.46 19.02

24. 0.613 14.71

5 33.46 28.22 4.23 29.23 9.71 19.52

23.75

0.543 12.90

6 33.46 23.99 3.6 29.86 9.92 19.94

23.54

0.480 11.30

7 33.46 20.39 3.06 30.4 10.09 20.31

23.37

0.425 9.93

8 33.46 17.33 2.6 30.86 10.25 20.61

23.21

0.376 8.73

9 33.46 14.73 2.21 31.25 10.38 20.87

23.08

0.333 7.69

10 33.46 12.52 1.88 31.58 10.49 21.09

22.97

0.295 6.78

11 33.46 10.64 1.6 31.86 10.58 21.28

22.88

0.261 5.97

12 33.46 9.05 1.36 32.1 10.66 21.44

22.8 0.231 5.27

13 33.46 7.69 1.15 32.31 10.73 21.58

22.73

0.204 4.64

14 33.46 6.54 0.98 32.48 10.79 21.69

22.67

0.181 4.10

15 33.46 5.56 0.83 32.63 10.84 21.79

22.62

0.160 3.62

TOTAL

291.13

158.81

NOTES: School Of Management Studies(SMS) , Nagaland University Dimapur: Nagaland

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CO. HAS ADOPTED WRITTEN DOWN VALUE METHOD FOR CHARGING DEPRECIATION & THE RATE OF DEPRECIATION IS 15%.

FOR THE FIRST YEAR THE CO. CAN CHARGE 20% MORE THAN THE ADDITIONAL DEPRECIATION RATE.

PROFIT BEFORE TAX (PBT) = GROSS PROFIT (G.P) - DEPRECIATION

INCOME TAX (I.T) = IT IS CHARGED @ 33.22%, WHICH IS CALCULATED AS

30% TAX + 7.5% OF 30 %( SURCHARGE) + 3% OF 32.25 %( EDUCATION –CESS &) PROFIT AFTER TAX (P.A.T) = P.B.T – I.T

CASH FLOW = GROSSPROFIT – INCOME TAXPRESENT VALUE OF CASH FLOW= CASH FLOW *DISCOUNTFACTOR

CALCULATIONS

Pay Back Period 2.63 years

Net Present Value Rs.88.11 lakhs

Profitability Index 2.25

Internal Rate Of Return 36.68%

Discounted Pay Back Period 3 .51 years

Average Rate Of Return 27.45%


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IRR CALCULATION OF RFO EXCHANGER SYSTEM AT GR (WITHOUT CDM)

RS. LAKHS

1 LAND P&M CIVIL TOTAL

PROJECT COST (PCWOFC) 0.00 68.7 2.00 70.7

FINANCIAL COST 0.00 0.00 0.00 0.00

0.00 68.7 2.00 70.7

2

PHASING (PCWFC) 0TH YEAR 1 ST YEAR 2 ND YEAR TOTAL

70.7 0.00 0.00 70.7

3

OPERATING COST RS. LAKHS

-REPAIR &MAINTENANCE @1.25% 0.9

-INSURANCE @ 0.4% 0.29

1.19

4

REALISATION

Delta products Product prices Freight under recovery ED benefits Products

Rs/MT Rs/MT Rs/MT MT/ CER RsLAKHS

FUEL OIL 18354 0.00 0.00 175 32.10

TOTAL 32.10

GROSS PROFIT = (32.10 – 1.19) LAKHS

= 30.91 LAKHS

Calculations without CDM


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Year

Gross Profit

Written Down Value

Depreciatio

n

Profit Before

Tax

Income Tax

PAT Cash Flow

s

Disc Factor @ 13%

PV Of Cash Flows

1 30.91 70.7 24.75 6.16 2.05 4.11 28.86 0.885 25.54

2 30.91 45.96 6.89 24.02 7.98 16.04 22.93 0.783 17.96

3 30.91 39.06 5.86 25.05 8.32 16.73 22.59 0.693 15.65

4 30.91 33.2 4.98 25.93 8.61 17.32 22.3 0.613 13.67

5 30.91 28.22 4.23 26.68 8.86 17.82 22.05 0.543 11.97

6 30.91 23.99 3.6 27.31 9.07 18.24 21.84 0.480 10.48

7 30.91 20.39 3.06 27.85 9.25 18.6 21.66 0.425 9.21

8 30.91 17.33 2.6 28.31 9.40 18.91 21.51 0.376 8.09

9 30.91 14.73 2.21 28.7 9.53 19.17 21.88 0.333 7.12

10 30.91 12.52 1.88 29.03 9.64 19.39 21.27 0.295 6.27

11 30.91 10.64 1.6 29.31 9.74 19.57 21.17 0.261 5.53

12 30.91 9.04 1.36 29.55 9.82 19.73 21.09 0.231 4.87

13 30.91 7.68 1.15 29.76 9.89 19.87 21.02 0.204 4.29

14 30.91 6.53 0.98 29.93 9.94 19.99 20.97 0.181 3.80

15 30.91 5.55 0.83 30.08 9.99 20.09 20.92 0.160 3.35

CALCULATIONS

Pay Back Period 2 .83 years

Net Present Value Rs.77.1

Profitability Index 2.08

Internal Rate Of Return 33.98%

Discounted Pay Back Period 3 .84 years

Average Rate Return 25.03%

ITEMWISE DETAILS OF COST ESTIMATE FOR RFO EXCHANGER


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EQUIPMENT COST 47.1

HEAT EXCHANGER 9.6

56.7

PIPE 4.4

TAXES &FREIGHT 1.2

62.3

INSTALLATION 2.0

64.3

ADD: CONTINGENCY @10% 6.4

70.7

CHAPTER 6


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FINDINGS ,CONCLUSION& RECOMMENDATION

A. FINDINGS

WITH CDM:

1. PAYBACK PERIOD METHOD:

Since the cash inflows are uneven pay back period can be calculated as:

In first two years we recover Rs 55.2 lakhs.

To recover Rs 70.70 we need Rs 15.5 lakhs more

This amount (Rs.15.77 Lakhs) can be recovered in third year. In third year cash inflow is Rs 24.47 lakhs

Therefore the Pay Back Period = 2 + 15.5

24.29

= 2.63 years

ThemaximumacceptablepaybackperiodofIOCL,GuwahatiRefineryis15years.

Here we have found that the payback period of the project which is with CDM is 2.63 years which is much less than the maximum acceptable payback period.

Thus we should accept the project.


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Initial Investment 70.70 lakhs

Inflow in 1st year 30.5 7 lakhs Inflow in 2nd year 24.63lakhs

Inflow in 3rd year 24.29 lakhs

2. Accounting Rate Of Return (ARR)

Average income after tax &depreciation = 291.13/15

= Rs 19.41 lakhs

Initial investment = Rs 70.70 lakhs

ARR = 19.41 x 100

70.70

= 27.45%

As the ARR of this project is 27.45% which is higher than the minimum rate established

by the management of the organization which is 13%, thus we accept the project.

3. Net Present Value (NPV)

PV of cash inflows = Rs 158.94 lakhs

Cash outflow = Rs 70.70 lakhs

NPV = 158.81 – 70.70

= Rs 88.11 lakhs

Here we see that NPV of the project is Rs 88.11 lakhs which is greater than 1 thus we accept the project.

4. Profitability Index (PI)



PI = 158.81

70.70


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= 2.25

Here PI is 2.25 which is greater than 1, so we accept the project

5. Discounted Pay Back Period:


Inflow in 1st year 27.05 lakhs Inflow in 2nd year 19.29 lakhs


Inflow in 4th year 14.71 lakhs

In the first three years we recover Rs 63.17 Lakhs

To recover Rs 70.70 Lakhs we need Rs 7.53 Lakhs more

This amount (Rs.7.53 Lakhs) can be recovered in fourth year. In fourth year cash inflow is Rs 14.71 Lakhs

Therefore the Discounted Pay Back Period = 3 + 7.53

14.71

= 3.51 years




6. Internal Rate Of Return:

IRR = 30% + 83.34 – 70.70 (40% – 30%)

83.34 – 64.41

= 36.68%


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As the IRR is higher than the opportunity cost of capital of the organization i.e.

13%, so we

Accept the project.

WITHOUT CDM

1. Pay Back Period

Initial Investment 70.70 lakhsInflow in 1st year 28.86 lakhs Inflow in 2nd year 22.93 lakhs


Since the cash inflows are uneven pay back period can be calculated as:

In first two years we recover Rs 51.79 lakhs.

To recover Rs 70.70 we need Rs 18.91 lakhs more

This amount (Rs.18.91 lakhs) can be recovered in third year. In third year cash inflow is Rs 22.59 lakhs

Therefore the Pay Back Period = 2 + 18.91

22.59

= 2.83 years





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2. Accounting Rate Of Return (ARR)

Average income after tax &depreciation = 265.58/15

= Rs 17.70 lakhs

Initial investment = Rs 70.70 lakhs

ARR = 17.70 x 100

70.70

= 25.03%

As the ARR of this project is 25.03% which is higher than the minimum rate established

by the management of the organization which is 13%, thus we accept the project.

3. Net Present Value (NPV)



NPV = 147.8 – 70.70

= Rs 77.1 lakhs

Here we see that NPV of the project is Rs 77.1 lakhs which is greater than 1 thus we accept the project.

4. Profitability Index (PI)



PI = 147.8

70.70

= 2.09


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Here PI is 2.09 which is greater than 1, so we accept the project

5. Discounted Pay Back Period


Inflow in 1st year 25.54 lakhs Inflow in 2nd year 17.96 lakhs


Inflow in 4th year 13.67 lakhs

In the first three years we recover Rs 59.15 lakhs

To recover Rs 70.70 lakhs we need Rs 11.55 lakhs more

This amount (Rs11.55 lakhs) can be recovered in fourth year. In fourth year cash inflow is Rs 13.67 lakhs

Therefore the Discounted Pay Back Period = 3 + 11.55

13.67

= 3.84 years




6. Internal Rate Of Return

IRR = 30% + 77.7– 70.70 (40% – 30%)

77.7 – 60.12


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= 33.98%

As the IRR is higher than the opportunity cost of capital of the organization i.e. 13%, so we accept the project.

Criterion With CDM Without CDM

Payback Period PBP < Target Period2.63<15

PBP < Target Period2.83<15

Net Present Value(NPV)

NPV > 1 i.e. Rs 88.11 > 1

NPV > 1 i.e. Rs 77.1> 1

Profitability Index PI > 1 i.e. 2.25 > 1

PI > 1i.e. 2.09 > 1

Internal Rate of Return(IRR)

IRR > Cost Of Capital 36.68%>13%

IRR > Cost Of Capital33.98%>13%

Discounted payback Period



Accounting Rate of Return(ARR)

ARR > Target RATE 27.47%>13%

ARR > Target rate 25.03%>13%

B. CONCLUSION To judge the worthiness of the project several aspects have been analyzed, considering CDM and without CDM whereby taking into consideration the financial viability and profitability of the project which also results in low CO2

emission as well as generate profit(by savings) in the long run .The various outcome by using the different capital budgeting techniques to find out the feasibility of the project are mentioned below:-

Based on the above findings we can conclude that the project is very much feasible from financial as well as from economic point of view.


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C.RECOMMENDATIONS

a) It is recommended that the old heat exchanger in DCU which was to recover additional heat in rundown circuit of Guwahati Refinery should be replaced with the new one so as to gain good amount of carbon credit and increase efficiency in production energy index at the same time generate revenue in

the form of savings .

b) There is no need of additional man power to run the facility & no operating & maintenance cost so it is advisable to install the new heat exchanger in the unit.

c) Since IOCL is a Public Sector Undertaking, one of its responsibility is to safeguard the environment. Since the project is viable from the financial point of view it’s recommended to accept the proposal since it will absorb the additional heat.

d) The increased heat recovery in the unit, due to installation of the new exchanger, would result in increased Medium Pressure generation from steam generator. This would reduce the energy consumption and hence the Energy Index of DCU.

e) The investment cost would be recovered in only 2.83 years and the installed heat exchanger would continue to yield recurring benefit.


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Annexure - I

Calculation of Accounting Rate of Return with C.D. M & Without C.D.M


Page 2

Year P.A.T (with CDM) P.A.T (without CDM)

1. 5.82 4.11

2. 17.74 16.04

3. 18.61 16.73

4. 19.02 17.32

5. 19.52 17.82

6. 19.94 18.24

7. 20.31 18.6

8. 20.61 18.91

9. 20.87 19.17

10. 21.09 19.39

11. 21.28 19.57

12. 21.44 19.73

13. 21.58 19.87

14. 21.69 19.99

15. 21.79 20.09

Total 291.31 265.58

Calculation Of Net Present Value (With C.D.M)

Year Cash Flows Discounting Factors@ 13 %

Present Values Rs (in

lakhs)Year 1 30.57 0.885 27.05

Year 2 24.63 0.783 19.29

Year 3 24.29 0.693 16.83

Year 4 24.00 0.613 14.71

Year 5 23.75 0.543 12.90

Year 6 23.54 0.48 11.30

Year 7 23.37 0.425 9.93

Year 8 23.21 0.376 8.73

Year 9 23.08 0.333 7.69

Year 10 22.97 0.295 6.78

Year 11 22.88 0.261 5.97

Year 12 22.80 0.231 5.27

Year 13 22.73 0.204 4.64

Year 14 22.67 0.181 4.10

Year 15 22.62 0.16 3.62

Total Present Values of Cash inflows

158.81

Less Initial investment

70.70

Net Present Value

88.11


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Calculation of Net Present Value (without CDM)

Year Cash Flows Discounting Factors@ 13%

Present Value Rs (in

lakhs)Year 1 28.86 0.885 25.54

Year 2 22.93 0.783 17.96

Year 3 22.59 0.693 15.65

Year 4 22.30 0.613 13.67

Year 5 22.05 0.543 11.97

Year 6 21.84 0.48 10.48

Year 7 21.66 0.425 9.21

Year 8 21.51 0.376 8.09

Year 9 21.38 0.333 7.12

Year 10 21.27 0.295 6.27

Year 11 21.17 0.261 5.53

Year 12 21.09 0.231 4.87

Year 13 21.02 0.204 4.29

Year 14 20.97 0.181 3.80

Year 15 20.92 0.16 3.35

Total Present Values of Cash Inflows

147.8

Less Initial investment

70.7

Net Present Value 77.1


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Calculation of Profitability Index (with CDM)

YEAR CASH FLOWS DISCOUNTING FACTORS @

13 %

PRESENT VALUE Rs (in

lakhs)Year 1 30.57 0.885 27.05

Year 2 24.63 0.783 19.29

Year 3 24.29 0.693 16.83

Year 4 24.00 0.613 14.71

Year 5 23.75 0.543 12.90

Year 6 23.54 0.48 11.30

Year 7 23.37 0.425 9.93

Year 8 23.21 0.376 8.73

Year 9 23.08 0.333 7.69

Year 10 22.97 0.295 6.78

Year 11 22.88 0.261 5.97

Year 12 22.80 0.231 5.27

Year 13 22.73 0.204 4.64

Year 14 22.67 0.181 4.10

Year 15 22.62 0.16 3.62

Total Present Values of Cash Inflows

158.81


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Calculation of Profitability Index (without CDM)


Page 2

Year CASH FlOWS DISCOUNTING FACTOR@

13%

PRESENT VALUES Rs (in lakhs)

Year 1 28.86 0.885 25.54

Year 2 22.93 0.783 17.96

Year 3 22.59 0.693 15.65

Year 4 22.30 0.613 13.67

Year 5 22.05 0.543 11.97

Year 6 21.84 0.48 10.48

Year 7 21.66 0.425 9.21

Year 8 21.51 0.376 8.09

Year 9 21.38 0.333 7.12

Year 10 21.27 0.295 6.27

Year 11 21.17 0.231 5.53

Year 12 21.09 0.261 4.87

Year 13 21.02 0.204 4.29

Year 14 20.97 0.181 3.80

Year 15 20.92 0.16 3.35

Total Present Values of Cash Inflows 147.8

Calculation of Internal Rate of Return (with CDM)Year cash

inflows 30% discount factor

P.V. of Cash inflow Rs(in lakhs)

40% discount factor

P.V. of cash inflow Rs(in lakhs)

1 30.57 0.77 23.52 0.71 21.84

2 24.63 0.59 14.57 0.51 12.57

3 24.29 0.46 11.13 0.36 8.92

4 24.00 0.35 8.40 0.26 6.24

5 23.75 0.27 6.40 0.19 4.42

6 23.54 0.21 4.88 0.13 3.13

7 23.37 0.16 3.72 0.09 2.21

8 23.21 0.12 2.85 0.07 1.57

9 23.08 0.09 2.18 0.05 1.11

10 22.97 0.07 1.67 0.03 0.79

11 22.88 0.06 1.28 .02 0.56

12 22.80 0.04 0.98 .02 0.40

13 22.73 0.03 0.75 .01 0.29

14 22.67 0.03 0.57 .01 0.20

15 22.62 0.02 0.44 .01 .14

Total 83.34 64.41


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Calculation of Internal Rate of Return (without CDM)Year cash

inflows 30% discount factor

P.V. of Cash inflow Rs(in lakhs)

40% discount factor

P.V. of cash inflow Rs(in lakhs)

1 28.86 0.77 22.2 0.71 20.61

2 22.93 0.59 13.57 0.51 11.70

3 22.59 0.46 10.28 0.36 8.23

4 22.30 0.35 7.81 0.26 5.80

5 22.05 0.27 5.94 0.19 4.10

6 21.84 0.21 4.52 0.13 2.90

7 21.66 0.16 3.45 0.09 2.05

8 21.51 0.12 2.64 0.07 1.46

9 21.38 0.09 2.02 0.05 1.03

10 21.27 0.07 1.54 0.03 0.74

11 21.17 0.06 1.18 .02 0.52

12 21.09 0.04 0.91 .02 0.37

13 21.02 0.03 0.69 .01 0.26

14 20.97 0.03 0.53 .01 0.19

15 20.92 0.02 0.41 .01 0.13

Total 77.7 60.12


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Annexure - II

Benefit calculation for installation of RFO Exchanger at Delayed Coking Unit

Parameter Value Unit Remarks1) Saving in High pressure steam due to

installation of heat exchanger 2369687.7 Kg/Year

2) Steam to fuel ratio 12.6 : 1 Ratio As per AOR 2006-07

3) Fuel

=175

Metric Ton

4) Cost 18354 Per Metric Ton

5) Monetary Benefit for installation of RFO exchanger(Saving)

175 × 18354 =32.10

Lakhs/per year

Very Attractive

Calculation for CO2 Emission Reduction & CDM Benefit

Parameters Value Units1) Fuel Saving from

RFO Exchanger175 MT/pa

2) Average Density of refinery fuel oil

0.96 MT/M3

3) Calculated C:H Ratio of RFO(carbon:hydrogen)

7.63:1

4) Carbon content of saved fuel oil

= 154.62

MT

5) CO2 Emission due to saved fuel oil (considering 12 MT of carbon generates 44 Mt of CO2)

= 567

MT

6) Rate of carbon credit

8 Euro

7) Rs to Euro conversion

56.18


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8) CDM Benefit 567 ×8 ×56.18 = 2.55 Lakhs

ANNEXURE -III

COMPLETION SCHEDULE:

The project is estimated to be complete within 12 months from the date of financial approval of the proposal. Chart for various activities envisaged for completion and commissioning is attached below:


Page 2

REFERENCES

Senior Financial Manager – Mr.S.GURUMOORTY.

Financial Manager - Mr. A N MEHTAJI.

Financial Manager – Mr.N.M.BHALERAO.

ACCOUNTS OFFICER – MR. SAURABH SUMAN

Accounts Officer - Mr. RITESH AGARWAL.

Accounts Officer - Mr.ABHISHEK MAURYA.

Annual Report of IOCL

BIBLOGRAPHY

MAGAZINES

Various Reports published by IOCL

SEARCH ENGINES

www.iocl.com

www.bpcl.com

www.hpcl.com

www.google.com

www.economictimes.com

WEBSITES OF THE ORGANISATIONS

www.iocl.com

WORD OF THANKS


Page 2

http://www.iocl.com/

http://www.economictimes.com/

http://www.google.com/

http://www.hpcl.com/

http://www.bpcl.com/

http://www.iocl.com/

Towards the end I take the opportunity to pay hearty regards to the

HOD and Management Faculty of SCHOOL OF MANAGEMENT STUDIES for

providing me the opportunity to work with such a big company.

I express my deep sense of gratitude to all those who patiently explained

and clarified me several doubts in the intricate subject, and above all guiding me

throughout the internship period. I cherish the enriching learning experience in

IOCL, though for a brief period. I once again thank Guwahati Refinery, IOCL for

the invaluable opportunity and experience.

I would like to thank all those readers who will go through this project in

future. I welcome any suggestion or comments from the reader.

SHRUTI BUCHA

NU/MN/14/10

School of Management Studies

NAGALAND UNIVERSITY


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report on calculation of cash flow and irr of new heat exchanger in rfo rundown circuit of guwahati...

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