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A PROJECT REPORT ON FINANCIAL STATEMENT ANALYSIS IN BHARAT HEAVY ELECTRICALS LIMITED (RAMACHANDRAPURAM,HYDERABAD-500032) A Project Report submitted in partial fulfilment for the award of the degree of MASTER OF BUSINESS ADMINISTRATION BY P.Mahesh (1409-10-672-050) MBA UNDER THE GUIDANCE OF MR. P.V.ARUN KUMAR MANAGER(FINANCE & ACCOUNTS)
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Page 1: A Project Report on Financial Statement Analysis

A PROJECT REPORT ON

FINANCIAL STATEMENT ANALYSIS

IN

BHARAT HEAVY ELECTRICALS LIMITED

(RAMACHANDRAPURAM,HYDERABAD-500032)

A Project Report submitted in partial fulfilment for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

BY

P.Mahesh

(1409-10-672-050)

MBA

UNDER THE GUIDANCE OF

MR. P.V.ARUN KUMAR

MANAGER(FINANCE & ACCOUNTS)

DVR PG INSTITUTE OF MANAGEMENTKASHIPUR VILLAGE, SANGAREDDY MANDAL,

MEDAK Dist - 502 285

ANDHRA PRADESH, INDIA.

2010-2012

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ACKNOWLEDGEMENT

I express my sincere gratitude to management of “BHARAT

HEAVY ELECTRICALS LIMITED” for allowing me to conduct the study

in their organization.

My sincere thanks to sir P.V.ARUN KUMAR, Finance

Manager , BHEL, RAMACHANDRAPURAM for his guidance and

suggestions in completion of this project.

Finally, I would like to convey my special regards to my

parents and all my friends who helped me in carrying out this task.

P.MAHESH

(1409-10-672-050)

Page 3: A Project Report on Financial Statement Analysis

DECLARATION

I hereby declare that the project report entitled

“FINANCIAL STATEMENT ANALYSIS OF BHARAT HEAVY

ELECTRICALS LIMITED” has been prepared by me during the year 2010-

2012 in partial fulfilment of the degree of MASTER OF BUSINESS

ADMINISTRATION, OSMANIA UNIVERSITY.

I also declare that the project work is the result of my own

efforts and it hasn’t been submitted to any other university for the award of any

degree or diploma.

P.MAHESH

(1409-10-672-050)

PLACE:

DATE:

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CONTENTS

CHAPTER 1

INTRODUCTION

OBJECTIVE OF THE STUDY

NEED AND IMPORTANCE OF STUDY

SOURCE OF THE DATA

METHODOLOGY

SCOPE OF THE STUDY

LIMITATIONS OF THE STUDY

CHAPTER 2

COMPANY PROFILE

CHAPTER 3

THEORETICAL FRAMEWORK OF

FINANCIAL STATEMENT ANALYSIS

CHAPTER 4

DATA ANALYSIS AND INTERPRETATION

CHAPTER 5

FINDINGS

CONCLUSION AND SUGGESTIONS

BIBILOGRAPHY

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INTRODUCTION

Analysis means establishing a meaningful relationship between

various items of the two financial statements with each other in such a way that

a conclusion is being drawn. By financial statements by means of two

statements

Profit and loss account or Income Statement

Balance Sheet or Position Statement

These are prepared at the end of a given period of time. They are

the indicators of profitability and financial soundness of the business concern.

The term financial analysis is also known as analysis and interpretation of

financial statements. It refers to the establishing meaningful relationship

between various items of the two financial statements i.e. Income statement and

Position statement. It determines financial strength and weakness of the firm.

Analysis of financial statements is an attempt to assess the efficiency and

performance of an enterprise. Thus, the analysis and interpretation of financial

statements is very essential to measure the efficiency, profitability , financial

soundness and future prospects of the business units. Financial analysis serves

the following purposes.

Measuring the Profitability

The main objective of a business is to earn a satisfactory return on

the funds invested in it. Financial analysis helps in ascertaining whether

adequate profits are being earned on the capital invested in the business or not.

It also helps in knowing the capacity to pay the interest.

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Indicating the trend of achievements

Financial statements of the previous years can be compared and

the trend regarding various expenses, purchases, sales, gross profits and net

profit etc can be ascertained. Value of assets and liabilities can be compared and

the future prospects of the business can be envisaged.

Assessing the growth potential of the business

The trend and other analysis of the business provides information

indicating the growth potential of the business.

Comparative position in relation to other firms

The purpose of financial statements analysis is to help the

management to make a comparative study of the profitability of various firms,

engaged in similar businesses. Such comparison also helps the management to

study the position of their firm in respect of sales expenses, profitability and

utilising capital, etc.

Assess overall financial strength

The purpose of financial analysis is to assess the financial

strength of the business. Analysis also helps in taking decisions, whether funds

required for the purchase of the new machines and equipments are provided

from internal sources of the business or not if yes, how much? And also to

assess how much funds have been received from external sources.

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Objectives of the study

To calculate the important financial ratio of the organisation as

a part of the ratio analysis thereby to understand the changes

the needs and trends in the firm’s financial position.

To assess the performance of B.H.E.L on the basis of earnings

and also to evaluate the solvency position of the company.

To identify the financial strengths and weaknesses of the

organization.

To give the appropriate suggestions to the investors. To help

them to make more informed decisions.

Need and importance of study

Financial performance of an enterprise will affect other types of

performance and also the productivity of finances is good, the productivity of

men and material would be good.

Moreover the study of non-economic and qualitative performance, which

studies the non economic factors like customer satisfaction, citizen satisfaction

etc.

Source of data

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The data is collected from the following sources.

Three year annual report of BHEL from 2007-2010

Interaction with the related finance department.

METHODOLOGY

The study carried with the cooperation of the management who

permitted to carry on the study and provided the requisite data collected from

the following sources.

Primary data

Secondary data

PRIMARY DATA

The information collected directly without any reference is primary

data. In the study it is mainly through conversation with concerned officers or

staff members either individually or collectively. The data includes:

1. Conducting personal interview with the officers of the company.

2. Individual observation and inferences.

3. From the people who are directly involved with the transaction of

the firm.

Secondary data

Page 9: A Project Report on Financial Statement Analysis

Study has been taken from secondary sources i.e. published annual

reports of the company editing, classifying and tabulation of the financial data.

For this purpose performance data of BHEL for the years 2007-2008 to 2009-

2010 has been used.

Scope of study

The scope and period of the study is being restricted to the following.

1. The scope is limited to the operations of the BHEL.

2. The information is obtained from the primary and secondary data was

limited to the BHEL.

3. The profit and loss, the balance sheet was on the last six years.

4. Comparison analysis was done by comparison of sister units.

Limitations of study

1. The study is confined to a period of last 4 years.

2. As most of the data is from the secondary sources, hence the accuracy is

limited.

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COMPANY PROFILE

BHARAT HEAVY ELECTRICALS LIMITED

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The vital role played by the BHEL today in the country is the mark of

it continuous efforts to improve the service in the nation by consultancy,

manufacturing and offering services in power sector.

This success story of BHEL however goes back to 1956 when its first

plant was set up in BHOPAL. Three more major plants followed in

HARIDWAR, HYDERABAD and THIRUCHIRAPALLI flowed this. These

plants have been the core of BHEL’S efforts to grow and diversify and become

one of the most integrated power and industrial equipment manufacturers in the

world. The company now has 14 manufacturing units,8 service centres and 4

power sector regional centres, besides project sites spread all over India and

abroad.

BHEL manufactures over 180 products under 30 major product groups

and meets the needs of core sector like power, industry, transmission, defence,

telecommunications, oil business etc. Its products have established an enviable

reputation for high quality and reliability. This is due to the emphasis placed all

along on design, engineering and manufacturing to international standards by

acquiring and adopting some of the best technologies developed in its own

R&D centres. BHEL has acquired ISO 9000 certification for environments.

BHEL caters to the needs of different sectors by designing and manufacturing

according to the need of its client in power sector.

COMPANY VISION,MISSION and OBJECTIVE

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VISION:

A world class, innovation, competitive and profitable

engineering enterprise providing total business solutions.

MISSION:

To be the leading engineering enterprise providing quality

products system and services in the field of energy, transportation,

industry, infrastructure and other potential areas.

VALUES :

1. Meeting commitments made to external and internal

customers.

2. Faster learning, creativity and speed of response.

3. Respect for dignity and potential of individuals.

4. Loyalty and pride of the company.

5. Team playing.

6. Zeal to excel.

7. Integrity and fairness in all matters.

OBJECTIVES

GROWTH:

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To ensure a steady growth by enhancing the competitive edge of

BHEL in exiting business, new areas and international operation so as to fulfil

national expectations from BHEL.

PROFITABILITY:

To provide a reasonable and adequate return on capital employed,

primarily through improvements in operational efficiency, capacity utilization

and productivity and generate adequate internal resources to finance the

company growth. Confidence in providing increased value for this money

through international standards of product, quality, performance and superior

customer services.

TECHNOLOGY:

To achieve technology excellence in operations by development of

indigenous technologies to and efficient absorption and adaptation of imported

technologies to suit business needs and priorities and provide a competitive

advantage of the company.

IMAGE:

To fulfil the expectation which stock holders like government as

own employees, customers and the country at large have from BHEL.

SWOT ANALYSIS OF BHEL

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The strength, weakness, opportunities and threats which are being experienced

by BHEL as a growing concern have been summarized up in the following

lines.

STRENGTH’S

1. Vast pool of trained man power.

2. Excellent state of art facilities.

3. Good working atmosphere

4. Rapport between management and union.

5. Product manufactured international quality

6. Low labour cost and low manufacturing cost.

WEAKNESS

1. Excess man power

2. Slippage in delivery commitments

3. System implementation adequate

4. No financial package

5. Inadequate compensation package to employees.

OPPORTUNITIES

Page 15: A Project Report on Financial Statement Analysis

1. Growing power sector machinery

2. Liberalization has opened up the market

3. Navratna company status

4. Dominant player in domestic market.

THREATS

1. Liberalization–entry of MNC’S or private sector-more competition.

2. MNC’S taking away good employees with attractive packages.

3. Government taxation policy-against manufacturing sector.

4. Poor infrastructure.

PRODUCTS OF BHEL

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BHEL manufactures a wide range of power plant equipments and also caters

to the industry sector.

1. Gas turbines

2. Steam turbines

3. Compressors

4. Turbo generators.

5. Pumps

6. Pulverizes

7. Switchgears

8. Oil rigs

9. Electrics for urban transportation system

10.Telecommunication.

Page 17: A Project Report on Financial Statement Analysis

THEORITICAL

FRAMEWORK OF

FINANCIAL STATEMENT

ANALYSIS

INTRODUCTION TO FINANCE:

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Financial statement is that managerial activity which is

concerned with the planning and controlling of the firm financial resources.

Though it was a branch of economic till 1890 as a separate activity or discipline

it is of recent origin. Still, as no unique body knowledge of its own, and draws

heavily on economics for its theoretical concepts even today.

The subject of financial management is of immense interest both

academicians and practising manager. It is of great interest to academicians

because the subject is still developing. And there are still certain areas where

controversies exist for which no unanimous solutions have been reached as yet.

Practicing manager are interested in this subject because among the most

crucial decision of the firm are those which relate to finance and an

understanding of the theory of financial management provides them with

conceptual and analytical insight to make those decision skilfully.

SCOPE:

Firms create manufacturing capacities for production of good, some

provide services to customers. They sell their goods or services to earn profit.

They fund to acquire manufacturing and other facilities. Thus the three most

important activities of a business firm are:

PRODUCTION

MARKETING

FINANCE

FUNCTION:

Page 19: A Project Report on Financial Statement Analysis

The finance function form production, marketing and other

functions. Yet the function themselves can be readily identified. The function of

raising funds, inverting them in assets and distributing returns earned from

assets to shareholder respectively. The finance functions are:

Investment or long term asset mix decision

Financing or capital mix decision

Dividend or profit allocation decision

Liquidity or short term asset mix decision.

OBJECTIVES OF THE STUDY:

1. To calculate the important financial ratio of the organization as a part of

the ratio analysis thereby to understand the change and treads in the firm

financial position.

2. To access the performance of the BHEL on the basis of earnings and also

to evaluate the solvency position of the company.

3. To identify the financial strengths and weaknesses of the organization.

4. To give appropriate suggestion to the investors. To help them to make

over,

5. Informed decision.

SCOPE OF THE STUDY:

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The scope and period of the study is restricted to the following.

1. The scope is limited to the operation in the BHEL.

2. The information obtained from the primary and secondary data was

limited to the BHEL

3. The key information performance indicated is taken from 2007-2010.

4. The profit and loss, the balance sheet was on the last 3 years.

5. Comparison analysis was done in comparison of the sister units.

LIMITATIONS OF STUDY:

1. The study is confined to a period of last 3 years.

2. As most of the data is from secondary sources, hence the accuracy is

limited.

METHODOLOGY:

The study basically depends on:

1. PRIMARY DATA

2. SECONDARY DATA

PRIMARY DATA COLLECTION:

The information collected directly without any reference is primary data. In

the study it is mainly through conservation without concerned officers or staff

member either individually or collectively. The data includes.

1. Conducting personal interview with officers of the company.

2. Individual observation and inferences.

Page 21: A Project Report on Financial Statement Analysis

3. From the people who are directly involved with the transaction of the

firm.

SECONDARY DATA COLLECTION

Study has been taken from secondary sources i.e. published annual

report of the company. Editing. Classifying and tabulation of the

financial data for this purpose performance data of BHEL or the

yeary2007-2008 to 2009-2010 have been used.

INDEPTH ANALYSIS OF FINANCIAL ANALYSIS:

(A)DEFINITIONS:

The term “financial analysis” is also known as “analysis

and interpretation of financial statements”. It refers to the process of

determining financial strengths and weaknesses of the firm by establishing

strategic relationships between the items of the balance sheet, profit and loss

account and other operative data.

ACCORDING TO Mr. HARRY GUTTMANN:

“The first and most important functions of financial statements

are of course to those who control and direct the business to the end of security

the profits and maintaining sound financial conditions.”

(B)NATURE OF FINANCIAL STATEMENTS:

The term “financial statements” refers to the balance sheet

reflection the financial position of the assets, liabilities a capital of a particular

company during a certain period and profit and loss account showing the

operational results of the company during a certain period. Financial statements

are plain statements of informed opinion uncompromising in their truthfulness.

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It is meant that with in the limits of accepted accounting principles and the very

human abilities of the persons preparing them they have to rely on judgements

and estimated divorced of prejudice.

(C)CONVENTIONS:

According to the American institute of certified public

accounts, financial statements reflect , “a combination of recorded facts

accounts conventions and personal judgements and the judgements and the

conventions applied affect them materially”, this implies that the exhibited in

the financial statements are affected by recorded facts, accounting conventions

personal judgements.

(D) USES AND IMPORTANCE OF FINANCIAL STATEMENTS:

The financial statements are mirrors which reflect the financial position and

operating strength’s or weaknesses of the concern. These statements are useful

to management, investors, creditors, bankers, workers, government and public

at large. George O May points of the following measure used of financial

statements:

As a basis for taxation.

As a basis for price or rate regulation

As a guide to the value of investment already made

As a basis for granting credit.

(E)LIMITATIONS OF FINANCIAL STATEMENTS:

Financial statements are essentially interim reports and hence

cannot be final because the actual gain or loss of a business can

be determined only efface it has put down its shutters.

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They tend to give an appearance if finality and accuracy,

because they are expressed in exact money amount. Any value

to the amounts presented in the statement depends on the value

standards of the person dealing with them.

The balance sheet loses its functions as an index of current

economic realities due to the fact the financial statements are

compiled on the basis of historical costs while there is a market

decline in the value of the monitoring unit and the resultant rise

in prices. The problem has become more important especially

during the war and the post war period.

They do not give effort to many factors, which have a hearing

on financial conditions and operating results because they

cannot be stated in terms of money and are qualitative in nature.

Such factors are reputation and prestige of the business with the

public its credit rating the efficiency and loyalty of its

employees and integrity of the management.

Due to these limitations it is said that financial statements don’t

show the financial conditions of the business rather they show,

the position of financial accounting for a business.

(F)PARTIES INTERESTED IN FINANCIAL STATEMENTS:

Now a days the ownership of capital of many public companies

has become truly board based due to dispersal of shareholding, hence, the public

in general evinces interest in the financial statements. Apart from the

shareholders there are other persons and bodies who are also interested in

financial results disclosed by the annual reports of the companies. As already

mentioned, such persons and bodies include:

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1. Potential investors

2. Creditors, potential suppliers or other doing business with the company.

3. Debenture holders

4. Credit institutions like bankers.

5. Employee customers who wish to make along standing contact with the

company.

6. Economic and investment analysis

7. Members.

(G)ANALYSIS AND INTERPRETATION OF FINANCIAL

STATEMENTS:

Analysis and interpretation of financial statements are and attempt

to determine the significance and meaning of the financial statement data as so

that a forecast can be made of the prospects for future earnings ability to pay

interest, debt and maturities (current and long term) and profitability of a sound

dividend policy.

Financial analysis main function is pinpointing of the strength’s

and weaknesses of a business concerns by regrouping and analysis of figure

contained in financial statements by making comparison’s of various

component and by examine their content. The financial manager uses this as the

basis to plan future financial requirements by means of forecasting and

budgeting procedures.

The analysis of and interpretation of financial statements represents

the lost of the four measure steps of accounting viz.

Page 25: A Project Report on Financial Statement Analysis

Analysis of each transaction to determine the accounts to debited and

credited and the measurements and the valuation of each transactions to

determine the amounts involved.

Recording of the information in the journals. Summarization in largest

and preparation of work sheet.

Preparation of financial statements.

Analysis and interpretation of financial statements results in the

presentation of information that assets business managers, creditors and

investors. This requires a clear understanding of monitoring item of the

items.

The analysis must group that represents sound and unsound

relationships reflected by the financial statements. Those, the data is more

maintain full and it is placed in better perspective when it is provision and by

means of measurement, it’s relationship with others is established in terms of if

relative significance and it is ranked in terms of its relative significance. One

can achieve this by comparisons made between related items in the statements

series of years.

(H)TYPES OF FINANCIAL STATEMENTS:

Financial statements primarily comprise two basic statements:

1. The position statements of the balance sheet.

2. The income statements or the profit and loss account.

Accounting principles specify that a complete set of financial statements must

include:

1. A balance sheet

Page 26: A Project Report on Financial Statement Analysis

2. An income statement

3. A statement of change in owners accounts.

4. A statement of changes in financial position.

BALANCE SHEET:

The balance sheet is one of the important statements

depicting the financial strength of concern. It shows the properties that are

owned on one hand and on the other hand the sources of the assets owned by the

concern and all the liabilities and claims it owes to owners and outsiders. The

balance sheet is prepared on a particular date. The right hand shows properties

and assets and the left hand shows liabilities.

INCOME STATEMENT OR PROFIT AND LOSS ACCOUNT:

Income statement is prepared to determine the operation position of the

concern. It is a statement of revenues. The income statement may be prepared in

the form of manufacturing account to find out the cost of the production in the

form of trading accounts to determine gross profit or loss, in the form of profit

and loss account to determine net profit or net loss.

STATEMENT OF CHANGES IN OWNERS EQUITY:

The term owners equity refers in the claims of the owners of the

business against the assets of the firm. It consist of two elements.

1. Paid up share capital i.e. the initial amount of funds invested by the

shareholders.

2. Retained earnings/reserves and surplus representing undistributed profits.

The statement of changes in owners equity simply shows

the beginning balance of each owners equity account, the reasons of

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increases and decreases in each, and its ending balance. However, in most

cases the owners equity account changes significantly in retain earnings

and hence the statement of changes in owners equity becomes merely a

statement of retained earnings.

STATEMENT OF CHANGES IN FINANCIAL POSITION:

The basic financial statement i.e. the balance sheet and profit and loss

account and income statement of a business reveals the net effect of various

transactions on the operational position of the company. But there are many

transactions that do not operate through profit and loss account. Those for a

better understanding another statement of changes in financial position has to be

prepared to show the changes in assets and liabilities from the end of another

point of time. The statement of changes in financial position may take any of

the two forms. They are:

Funds statements

Cash flow statements

TOOLS OF FINANCIAL ANALYSIS USED IN THE STUDY:

MEANING OF COMPARATIVE STATEMENT:

The comparative financial statements are the statements of the

financial position of different periods; the elements of financial positions are

then in a comparative form to give idea of financial position of two or more

periods. The comparative statement may show:

Absolute figures

Changes in absolute figures i.e. increase or decrease in absolute figures.

Absolute data in terms of percentage.

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Increase or decrease in terms of percentage.

COMPARATIVE BALACE SHEET:

It is a statement of financial position of a business at a specific

movement of time. It represents all assets owned by the business at a particular

movement of time and the claims of the owners and outsiders against those

assets at the time. It is a way they shape the financial condition of the business

at that time.

The important distinction between an income statement and

balance sheet is that the income statement is for a period where as balance sheet

is on a particular date.

COMPARATIVE INCOME STATEMENT:

The comparative income statement gives the results of the

operation of a business. The comparative income statement gives an idea of the

program of a business over a period of time. The changes in absolute data in

money values and percentages can be determined to analyze the profitability of

the business.

GUIDELINES FOR INTERPRETATION OF INCOME STATEMENT:

The analysis and interpretation of income statement will involve

the following steps:

1. The increase or decrease in sales should be compared with the

increase or decrease in cost of goods sold. An increase in sales will

not always mean an increase in profit. The profitability will

improve if increase in sales promotion and the control of operating

expenses.

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2. The second step of analysis should be the study of operation profit.

The operating expenses such as office and administrative expenses.

Selling and distribution expenses should be deducted from gross

profit to find out operating profit which will result from the

increase in sales position and control of operating expenses.

3. The increase or decrease in net profit give an idea about overall

profitability of the concern, non-operating expenses such as interest

paid, loss from sale of assets, writing off to deferred expenses or

deducted from operational profit we get the figure of operating

profit.

4. An opinion should be formed about profitability of the concern and

it should be given at the end. This should be mentioned whether the

overall profitability is good or not.

COMMON SIZE STATEMENTS:

The common size statement, balance sheet and income statement

are shown in analytical percentages. The figures are shown as percentages of

total assets, total liabilities and total sales. The total assets are taken as of and

different assets are expressed as a percentage of the total.

1. Common size balance sheet: A statement in which balance sheet items

are expressed as the ration of each asset to total assets and the ratio of

each liability is expressed as a ratio of total liabilities is called common

sized balance sheet.

2. Common size income statement: The items in income statement can be

shown as percentage of sales to show the relation of each item to sales. A

significant relationship can be established between item of income

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statement and value of the sales. The increase in sales will certainly

increase selling expenses and not administrative are financial expenses.

TREND ANALYSIS:

Trend percentages:

The method of trend percentages in useful analytical device

for the management since y substitution of percentage for large amounts, the

clarity and readability are achieved.

Trend percentages are immensely helpful in making

comparative study of the final statements for several years. The method of

calculating trend percentages involves the calculation of percentage relationship

that each item bears to the same item in the base year. The earliest year may be

taken as base year. Each item of the base year is taken as 100 and on the basis

the percentage for each of the item of each year is calculated.

Least Square Method:

This method is widely used in practised. It is a mathematical

method and with the help of a trend line fitted to the data in such a manner by

using the actual figures of the study period, we have to calculate the trend

values for these periods. Based on this value we can easily forecast the values of

the future period. The method of least square may be used either to fit a straight

line trend or a parabolic trend. The straight line is represented by the equation

Y(C)=A+B(X).

ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENT:

An attempt has been made to analyze and interpret the

financial statements of BHEL for the period of 2007-2010. These statements

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were prepared on the basis of the data in the balance sheets and profit and loss

accounts of the BHEL for the above period.

RATIO ANALYSIS:

A ratio is a simple mathematical expression. It is a number

expressed in terms of another number, expressing the quantitative relationship

between the two, ratio analysis is the technique of interpretation of financial

statements with the help of various meaningful ratios. Ratios do not add to any

information that is already available, but they show the relationship between

two items in a more meaningful way.

Ratio analysis is a very important tool of financial analysis.

It is the process of establishing a significant relationship between the items of

financial statements to provide a meaningful understanding of the performance

and financial position of the firm. They help us to draw certain conclusions.

Comparison with related facts is the basis of ratio analysis. Ratios may be used

for comparison in any of the following ways.

1. Comparison of a firm with its own performance in the past.

2. Comparison of one firm with its own performance in the past.

3. Comparison of one firm with another firm in the industry.

4. Comparison of one firm with the industry as a whole.

5. Comparison of an achieved performance with pre-determined standards.

6. Comparison of one department of a concern with other departments.

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TYPES OF RATIOS

Liquidity ratio

Capital structure/leverage ratio

Profitability ratio

Activity ratio.

LIQUIDITY RATIOS: it measures the short-term solvency of the

firm. In a short period of a firm should be able to meet all its short-

term obligation i.e. current liabilities and provisions. It is current

assets that yield funds in the short period. Current assets are those,

which the firm can convert it into cash within one year or short

run. Current assets should not only yield sufficient funds to meet

current liabilities as they fall due but also to enable the firm to

carry on its day-to-day activities.

The following are the important liquidity ratios:

1. Current ratio

2. Acid test/quick ratio.

3. Cash ratio

4. Net working capital ratio

1.Current ratio: Current ratio is the ratio of current assets to current liabilities.

Current assets are the assets that are expected to be realized in cash or sold or

consumed during the normal operating cycle of the business or with in one year,

which ever is longer, they include cash in hand and bank, bills receivable, net

sundry debtors, stock of raw materials, finished goods and working in progress,

prepaid expenses, outstanding incomes, assured incomes and short term or

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temporary investments. Current liabilities are the liabilities that are to be repaid

within a period of one year. They include bills payable, sundry creditors, bank

overdrafts, outstanding expenses, income receivable in advance, proposed

dividend, provision for taxation, unclaimed dividends and short term loans and

advanced repayable within one year. Any instalment of long-term liability

payable within the next 12 months is also current liability.

CURRENT RATIO= CURRENT ASSETS/ CURRENT LIABILITIES

Generally 2 : 1 ratio is considered ideal for the company.

2. ACID TEST/QUICK RATIO: the acid test ratio is the ratio between quick

current assets and current liabilities and calculated by dividing the quick assets

by current liabilities. Quick assets mean those which can be converted into cash

immediately by exclusion of inventory and prepaid expenses from current

assets.

Acid test Ratio=Quick assets/Current liabilities.

Generally 1: 1 ratio is considered to be ideal for the company.

3. CASH RATIO: The cash ratio is the ratio of cash and bank balance, it is

calculated dividing cash and bank balance by current liabilities.

CASH RATIO= Cash and Bank balances/Current liabilities.

Generally 1 : 2 ratio is considered to be ideal for a company.

4. NET WORKING CAPITAL RATIO: Working capital ratio refers to

comparing current assets to current liabilities and serve as the liquidity reserve

avail. To satisfy contingencies and uncertainties. It is calculated by dividing net

working capital by capital employed.

Page 34: A Project Report on Financial Statement Analysis

Net Working Capital Ratio = net working capital/capital employed.

Generally higher ratio is considered ideal for a company.

CAPITAL STRUCTURE/LEVERAGE RATIO: These ratios indicate the

relative interests of owners and creditors in a business by showing long

term financial solvency and measure the enterprise’s ability to pay the

interest regularly and to repay the principal on maturity or in pre-

determined instalments at due dates.

The significant leverage ratios are:

1. Debt Equity Ratio

2. Proprietary Ratio

3. Capital Gearing Ratio.

4. Fixed assets Ratio

5. Interest coverage Ratio

6. Dividend Coverage Ratio

7. Debt Service coverage Ratio.

1.Debt Equity Ratio : It reflects the relative claim of creditors and shareholders

against the assets of the business. Debt usually refers to long-term liability.

Equity includes equity and preference share capital and reserves.

Debt Equity Ratio=long term liabilities/share holders funds.

Ideal debt equity ratio is 2 : 1

2.Propreitary ratio: It expresses the relationship between the net worth and total

assets. A high proprietary ratio is indicative of strong financial position of

business.

Page 35: A Project Report on Financial Statement Analysis

Proprietary ratio = Net worth/ Total Assets

Net worth = Equity share capital + fictitious Assets

Total assets= fixed assets + Current Assets

Generally higher the ratio the ideal it is.

3. Capital Gearing Ratio: A company is said to be highly geared if it has a high

capital gearing ratio and lowly geared if the capital gearing ratio is low. The

extent of gearing determined the future financial structure of the business. A

company that is highly geared will have to raise funds by issuing fresh equity

shares, whereas a lowly geared company would find it attractive to raise funds

by way of term loans and debentures.

Capital Gearing Ratio = funds bearing fixed interest and fixed dividend/equity

. share holder’s funds

Funds bearing fixed interest and capital=Debentures + term loans +preference .

. share capital.

Equity share holder funds=Equity share capital +reserves-fictitious funds.

4.Fixed Assets Ratio: This ratio indicates the mode of financial the fixed assets.

It is calculated as

Fixed assets Ratio= Fixed assets/capital employed

Capital employed= equity share capital + preference share capital +reserves +

long term Liabilities – Fictitious Assets.

Generally a ratio of 0.67 : 1 is considered ideal for a company.

5.Interest Coverage Ratio: This ratio is called as “debt service ratio”. This ratio

indicates whether a business is earning sufficient profits to pay the interest

charges. It is calculated as

Page 36: A Project Report on Financial Statement Analysis

Interest coverage ratio=PBIT/Fixed interest charges

PBIT=Profit before interest and taxes=PAT + Interest + Tax

Generally a ratio of around 6 is normally considered as ideal for a company.

6.Dividend coverage ratio: It indicates the ability of a business to pay and

maintain the fixed preference dividend to preference shareholders.

Dividend coverage ratio=PAT/Fixed preference dividend.

PAT= Profit After Taxes

7.Debt service coverage Ratio: It indicates whether the business is earning

sufficient profits to pay not only the interest charges, but also the instalments

due to the principal amount. It is calculated as

Debt service Coverage Ratio =(PBIT/Interest + Periodic Loan Installation)/(1-

Rate of income Tax)

Generally greater the ratio, the better is the servicing ability of company.

PROFITABILITY RATIO: Profitability ratios measure the profitability

of a company. Generally they are calculated either in relation to sales or

in relation to investments. The various profitability ratios are discussed

under the following heads.

(A) GENERAL PROFITABILITY RATIO’S:

1.Gross Profit Ratio: Gross profit is one of the most commonly used ratios. It

reveals the result of trading operations of the business. In other words, it

indicates to us the profitability of the business. It is calculated as

Gross Profit Ratio=(Gross Profit/Net sales)*100

Gross Profit=net sales-cost of goods sold.

Page 37: A Project Report on Financial Statement Analysis

Net Sales=Total Sales- Sales Returns

Cost of Goods Sold=Opening Stock + Purchases + Manufacturing expenses-

closing Stock.

Generally the higher the ratio, the better will be the performance of the

company.

2.NET PROFIT RATIO: It indicates the results of overall operations of the

firm. While the gross profit ratio indicates the extent of profitability of core

operations. Net profit ratio tells us about overall profitability. It is called as

Net Profit Ratio=(Net Profit after Tax/Net Sales)*100

Generally higher the ratio, the more profitable to the company.

3.OPERATING RATIO: It expresses the relationship between expenses

incurred for running the business, and the resultant net sales. It is calculated as

Operating Ratio=cost of goods sold + Office and Administrative expenses +

selling and distribution Expenses.

Generally lower the ratio, the better it is to the company.

4.OPERATING PROFIT RATIO: It establishes the relationship between

operating profit and sales. It is calculated as

Operating Profit Ratio=(Operating Profit/Net Sales)*100

Generally higher the ratio, the better it is to the company.

5.EXPENSES RATIO: Expenses ratios are the ratios that supplement the

information given by the operating ratio. Each of the expense rations highlights

the relationship given by the particular expense and net sales. For example,

factory expenses ratio is of factory expenses to net sales any expenditure can be

Page 38: A Project Report on Financial Statement Analysis

shown as a ratio to sales. All such ratios fall under the broad head of expenses

ratios.

(B) OVERALL PROFITABILITY RATIOS:

1.RETURN ON CAPITAL EMPLOYED RATIO(ROCE) OR RETURN ON

INVESTMENT RATIO(ROD):

This ratio reveals the earning capacity of the capital employed in

the business. In other words, capital employed is permanent capital invested in

the business. It is also called capital and hence, the ratio is also known as return

on invested capital

ROCE= (Profit before interest and taxes/capital employed) *100

2. RETURN ON NET WORTH(RONW): It indicates the return, which the

shareholders are earning on their resources invested in the business. It is

calculated as

RONW=(Profit after Tax/Net Worth)*100

Generally higher the ratio, the better it is to the shareholders.

3.RETURN ON EQUITY CAPITAL: It expresses the return earned by the

owners of the business, after adjusting for debt and preference capital. It is

calculated as

RETURN ON EQUITY= PAT- Preference dividend/equity shareholders funds.

Generally higher the ratio, the better it is to the company.

Page 39: A Project Report on Financial Statement Analysis

4.RETURN ON ASSETS RATIO(ROA): Return on assets reflects the return

earned by the firm for the company for the shareholders of the business on the

investment of all the financial resources committed to the business. It is

calculated as

ROA=PAT/TOTAL SALES

Generally higher the ratio, the better it is to the shareholders.

5.EARNINGS PER SHARE(EPS): It is the earning accruing to the equity

shareholders on every share held by them. It is calculated as

EPS= PAT-Preference dividend/number of equity shares.

Generally the ratio, the better is the performance of the company.

6.Dividends per share (DPS): It is the amount of dividend payable to the holder

of one equity share. It is calculated as

DPS=Dividend on equity share capital/number of equity shares

Generally from investors point of view, the higher the ratio, the happier the

investor.

7.DIVIDEND PAY OUT RATIO: It is the ratio of dividend per share to earning

per share. It is calculated as

Dividend Pay Out Ratio=DPS/EPS

8.PRICE EARNING RATIO(P/E Ratio): It expresses the relationship between

market price of one share of a company and earnings per share of that company.

P/E Ratio=Market Price of Equity share/EPS

There is no ideal P/E ratio.

Page 40: A Project Report on Financial Statement Analysis

9.DIVIDEND YIELD RATIO: It expresses the relationship between dividend

earned per share and the market price per share. In other words, it expresses the

return on investment by purchasing a share in the stock market , without

accounting for any capital appreciation. It is calculated as

DIVIDEND YIELD RATIO- Dividend per share/Market price of share.

10.BOK VALUE: It is the fraction of the net worth of the business as depicted

in the balance sheet, which is attributable to one equity share of the business . it

is calculated as

BOOK VALUE=Equity share holders funds/number of equity shares.

Generally higher the book value of the share, the more strong the business is

assumed to be.

ACTIVITY RATIO: Activity ratios measures the efficiency or

effectiveness with which a firm managers its resources or assets. They

calculate the speed with which various assets, in which funds are blocked

up, get converted into sales. The significant activity or turnover ratios are

1.INVENTORY TURN OVER RATIO OR STOCK TURN OVER RATIO:

Stock turnover ratio indicates the number of items the stock has turned over into

sales in a year. It indicates to us the extent of stock required to be held in order

to achieve a desired level of sales.

Inventory Turn Over Ratio = Cost of Goods Sold/Average Stock

Cost of Goods Sold=Sales-Gross Profit.

Average Stock=(Opening Stock + Closing Stock)/2

Generally 8 is considered ideal ratio of the company.

Page 41: A Project Report on Financial Statement Analysis

2.DEBTORS TURN OVER RATIO: Debtors Turn Over Ratio expresses the

relationship between debtors and net credit sales. It is calculated as

Debtors Turn Over ratio= Net Credit Sales/Average Debtors.

Generally the ratio between 10-12 an ideal value for the company.

3.CREDITORS TURN OVER RATIO: Creditors turn over ratio expresses the

relationship between creditors and net credit purchases. It is calculated as

Creditors Turn Over Ratio= Net Credit Purchases/Average Creditors.

Generally the ratio 12 is an ideal for the company.

4.WORKING CAPITAL TURN OVER RATIO: This ratio is defined as

Working Capital Turn Over Ratio= Cost of Goods Sold/Working Capital

Working Capital=Current Assets- Current Liabilities.

Generally higher ratio indicates efficient utilization of firm’s funds.

5.Fixed Assets Turn Over Ratio: It is Defined as ratio of Net Sales to the Fixed

Assets.

Generally the ratio of around 5 is considered ideal for the company.

6.TOTAL ASSETS TURN OVER RATIO: It is defined as ratio of Net Sales

to the Total Sales.

Generally higher the ratio, the greater is the ability of the firm to utilize the

investments in the business.

Page 42: A Project Report on Financial Statement Analysis

DATA ANALYSIS

AND

INTERPRETATION

Page 43: A Project Report on Financial Statement Analysis

Current Asset Liability Ratio

year current assets current liability Ratios

2001-02 155792 73129 2.13

2002-03 166669 74427 2.23

2003-04 155652 84990 1.83

2004-05 192697 116644 1.65

2005-06 235062 143200 1.64

2006-07 276062 208869 1.32

2007-08 310002 243220 1.27

2008-09 453597 376332 1.2

2009-10 580804 397574 1.46

2010-11 771519 502024 1.54

0

100000

200000

300000

400000

500000

600000

700000

800000

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Current asset liabilities ratio CurrentAsset

Current asset liabilities ratio CurrentLiability

Current Asset Liability Ratio

Interpretation –The ideal ratio for the concern is 2:1 i.e. current assets doubled

for the current liabilities considered to be satisfactory. The current ratio of

BHEL is less than ! .Thus it has to maintain its efficient current assets.

Page 44: A Project Report on Financial Statement Analysis

Acid Test RatioYear Liquid assets Liquid liabilities Ratio2001-02 898 73129 0.0122002-03 1281 74427 0.0172003-04 472 84990 0.0052004-05 2094 116644 0.0182005-06 4643 143200 0.0322006-07 12 208869 0.000052007-08 14 243220 0.000032008-09 15 376332 0.000039862009-10 1475 397574 0.003712010-11 1415 502024 0.002818

0

100000

200000

300000

400000

500000

600000

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Liquid Assets

Liquid Liabilities

Ratios

Acid Test Ratio – Current Assets – Inventory / Current Liabilities

The ideal quick ratio is 1:1 which is considered satisfactory for the concern. The

company is maintaining the ratio above the standard norm , thus the

management of BHEL is label to meet its current obligations.

Page 45: A Project Report on Financial Statement Analysis

Net working capital

year

Net working

capital

Capital

employed Ratios

2001-02 82663 90522 0.9131

2002-03 92242 99337 0.93

2003-04 70662 79114 0.8931

2004-05 76053 85026 0.894

2005-06 91862 102462 0.89

2006-07 67193 79459 0.84

2007-08 96410 107986 0.89

2008-09 77265 96894 0.797

2009-10 183230 207051 0.884

2010-11 269495 305907 0.881

0

50000

100000

150000

200000

250000

300000

350000

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Net working capital

Capital employed

Ratios

NET WORKING CAPITAL = NET WORKING CAPITAL / CAPITAL

EMPLOYED

A higher networking capital ratio indicates efficient utilization of working

capital . Therefore the company should concentrate more on working capital

management

Page 46: A Project Report on Financial Statement Analysis

Debt equity ratio

year Total debt Equity Ratios

2001-02 497 3252 0.15

2002-03 573 3252 0.17

2003-04 386 3252 0.11

2004-05 513 3252 0.15

2005-06 1053 3252 0.32

2006-07 607 3252 0.18

2007-08 587 3252 0.18

2008-09 2566 3252 0.789

2009-10 2034 3252 0.62

2010-11 2265 3252 0.70

0

500

1000

1500

2000

2500

3000

3500

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Total debt

Equity

Ratios

Debt Equity Ratio :

The debt equity ratio has been increasing over the years and it has been

maintained at a level of .62 for the financial year 2009-10

Page 47: A Project Report on Financial Statement Analysis

Fixed assets ratio

year Fixed Assets

Capital

employed Ratios

2001-02 7859 90522 0.07

2002-03 7095 99337 0.08

2003-04 8360 79114 0.07

2004-05 8896 85026 0.1

2005-06 10600 102462 0.1

2006-07 12347 79459 0.15

2007-08 9909 107986 0.09

2008-09 17699 96894 0.18

2009-10 22595 207051 0.11

2010-11 31830 305907 0.10

0

50000

100000

150000

200000

250000

300000

350000

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Fixed assets

Capital employed

Ratios`

Fixed Assets Ratio = Fixed Assets / Capital Employed

Generally financially well managed company will have its fixed assets financed

by long term funds. There fore , the fixed assets ratio should never be more than

!.A ratio of .67 is considered ideal. The results for BHEL is much less at 0.11

Page 48: A Project Report on Financial Statement Analysis

Interest coverage ratio

year PBIT Interest Ratios

2001-02 13500 3054 4.42

2002-03 13420 258 52.01

2003-04 15821 48 329.6

2004-05 33122 1105 29.97

2005-06 60867 682 89.24

2006-07 63290 2300 27.51

2007-08 68916 5870 11.74

2008-09 68478 6826 10.03

2009-10 86438 7101 12.17

2010-11 130330 8583 15.18

0

20000

40000

60000

80000

100000

120000

140000

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

PBIT

Interest

Ratio

Interest Coverage Ratio.= PBIT/INTREST

Interest coverage ration of BHEL is not constant , from 2008-09 the ratio is10

as in 2009 -10 the ratio is 12.17, There is a random fluctuation in the ratio

Page 49: A Project Report on Financial Statement Analysis

Gross profit

year Gross profit Net sales Ratios

2001-02 13500 153205 0.088

2002-03 13420 137838 0.097

2003-04 15821 174490 0.07

2004-05 33122 174668 0.189

2005-06 60867 267217 0.227

2006-07 63290 289241 0.218

2007-08 68916 310235 0.2224

2008-09 68478 414816 0.165

2009-10 86483 500342 0.172

2010-11 130330 665323 0.196

0

100000

200000

300000

400000

500000

600000

700000

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Gross profit

Net sales

Ratio

Gross Profit = Gross /net sales

Generally the higher gross profit ratio , the better for the performance of the concern .In BHEL , the

company has started to increase from the year on year which is a very good sign for the company.

Page 50: A Project Report on Financial Statement Analysis

Operating ratio

year Operating cost Net sales Ratios

2001-02 131006 153205 0.85

2002-03 116708 137838 0.84

2003-04 149823 174490 0.85

2004-05 136630 174668 0.78

2005-06 201962 267217 0.75

2006-07 221227 289491 0.76

2007-08 234677 310235 0.76

2008-09 338382 414816 0.81

2009-10 404647 500342 0.8

2010-11 524531 665323 0.79

0

100000

200000

300000

400000

500000

600000

700000

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Operating cost

Net sales

Ratios

Operating Ratio : Operating Cost / Net Sales

Generally the lower the Operating Cost , the better for the concern. The ratio

should be below1 which is satisfactory for the concern.

Page 51: A Project Report on Financial Statement Analysis

Return on capital employed

year PBIT

Capital

employed Ratios

2001-02 13500 90522 0.149

2002-03 13420 99337 0.135

2003-04 15821 79114 0.199

2004-05 33122 85026 0.389

2005-06 60867 102462 0.594

2006-07 63290 79459 0.796

2007-08 68916 107986 0.638

2008-09 68478 96894 0.706

2009-10 86438 207051 0.417

2010-11 130330 305907 0.426

0

50000

100000

150000

200000

250000

300000

350000

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

PBIT

Capital employed

Ratios

Return on Capital Employed = PBIT/Capital Employed

The higher the ROCE ratio , the better for the concern. The company has been

keeping up the good performance is increasing at the rapid phase which in turn

is a good sign for the company.

Page 52: A Project Report on Financial Statement Analysis

Debtors turnover ratio

year Net credit sales

Average

debtors Ratios

2001-02 153205 85001 1.8

2002-03 137838 81237 1.69

2003-04 174490 82829 2.1

2004-05 174668 112238 1.55

2005-06 267217 135322 1.97

2006-07 289491 177301 1.63

2007-08 310235 215291 1.44

2008-09 414816 287414 1.44

2009-10 500342 328201 1.53

2010-11 665323 537364 1.24

0

100000

200000

300000

400000

500000

600000

700000

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Net credit sales

Average debtors

Ratio

Debtors Turnover Ratio = Net Credit Sales / Average Debtors

The BHEL`s debtor turnover ratio was below 2 .Its has bee increasing since

2008-09 from 1.44 to 1.53 in 2009-10, the increasing trend Implies the efficient

management of Debtor and credit sales.

Page 53: A Project Report on Financial Statement Analysis

Creditors turnover ratio

year

Net credit

purchases

Average

creditors Ratios

2001-02 12060 29738 0.4

2002-03 16646 27610 0.6

2003-04 16350 20467 0.79

2004-05 16727 24225 0.81

2005-06 19656 39495 0.49

2006-07 21772 46452 0.48

2007-08 25459 54586 0.4664

2008-09 31900 58078 0.54926

2009-10 60293 88228 0.68

2010-11 65700 103305 0.64

0

20000

40000

60000

80000

100000

120000

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Net credit purchases

Average creditors

Ratio

Creditors Turnover Ratio : Net Credit Purchases /Average Creditors

Interpretation : The BHEL`s creditors Turn Over Ratio is at 0.68 , it has been on

the increasing trend since past two financial years. The management should try

to reduce this by adopting proper payment policies.

Page 54: A Project Report on Financial Statement Analysis

Fixed asset turnover ratio

year Net sales Fixed assets Ratios

2001-02 153205 7859 19.49

2002-03 137838 7095 19.42

2003-04 174490 8360 20.87

2004-05 174668 8896 19.63

2005-06 267217 10600 25.2

2006-07 289491 12247 23.63

2007-08 310235 9909 31.3

2008-09 414816 17699 23.43

2009-10 500342 22595 22.14

2010-11 665323 31830 20.90

0

100000

200000

300000

400000

500000

600000

700000

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Net sales

Fixed assets

Ratio

Fixed Assets Turnover Ratio. = Net Sales / Fixed Assets

At high fixed assets turnover ratio indicates better utilization of the firms fixed

assets. A ratio around 5 is considered ideal for the concern .In BHEL it is more

than 22.This is a very good sigh for the company.

Page 55: A Project Report on Financial Statement Analysis

Total asset turnover ratio

year Total debt Equity Ratios

2001-02 497 3252 0.15

2002-03 573 3252 0.17

2003-04 386 3252 0.11

2004-05 513 3252 0.15

2005-06 1054 3252 0.32

2006-07 607 3252 0.18

2007-08 587 3252 0.18

2008-09 2566 3252 0.78

2009-10 2034 3252 0.62

2010-11 2265 3252 0.70

0

500

1000

1500

2000

2500

3000

3500

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Total debt

Equity

Ratio

Total Assets Turnover Ratio : Net Sales / Total Assets

The Total Assets turnover ratio of the BHEL is below 1 . This shows greater

ability of the firm to utilize the investment in the business

Page 56: A Project Report on Financial Statement Analysis

Comparative income statement 2009-2010 and 2010-11

DESCRIPTION

  2009-10 2010-11 increase/decrease increase/decrease

     

TURNOVER- BHEL 1106 400 -706 -63.83%

- NON-BHEL 499236 664923 165687 33.19%

TOTAL TURNOVER 500342 665323 164981 32.97%

CHANGES IN WIP 49447 -25439 -74886 -151.45%

CHANGES IN FG -9622 -9622

EXPORT INCENTIVES 690 669 -422 -21.00%

GROSS TURNOVER 540857 640553 99696 18.43%

EXCISE DUTY 16859 33288 16429 97.44%

GTO LESS ED 523998 607265 83267 15.89%

DIRECT MATERIALS 340315 342167 1852 0.544%

SUB-CONTRACT

PAYMENT1356 1682

378 24.04%

POWER AND FUEL 1746 1693 -53 -3.04%

TRANSFER IN

SERVICE806 681

-125 -15.51%

TOTAL OF `C' 344223 346223 2000 0.58%

VALUE ADDED 179775 261042 81267 42.20%

PERSONNEL

PAYMENTS62236 69941

7795 12.38%

INDIRECT MATERIALS 3902 5861 2059 52.76%

OTHER EXPENSES -

BHEL7101 8583

1482 20.87%

OTHER EXPENSES -

NON BHEL26301 27410

1109 4.22%

Page 57: A Project Report on Financial Statement Analysis

PROVISIONS -226 38565 %

PROV.EXCH.VAR. 894 -1523 %

LESS:MISC.INCOME 11522 23356 11834 102.71%

TOTAL OF `E' 88686 125481 36795 41.49%

GROSS MARGIN

(PBIDT)91089 135561

44472 48.82%

DEPRECIATION 4606 5231 625 13.57%

DRE ON VRS     0

GROSS PROFIT (PBIT) 86483 130330 43847 50.70%

INTEREST -7101 -2905 -10006 -140.91%

PROFIT BEFORE TAX 93584 133235 39651 42.37%

GTO LESS ED 523998 607265 83267 15.90%

0

OPERATING COST 404647 524531 119884

Page 58: A Project Report on Financial Statement Analysis

Comparative income statement 2008-09 & 2009-10

DESCRIPTION

 2008-

09

2009-

10 Increase/Decrease Increase/Decrease%

     

TURNOVER- BHEL 779 1106 327 41.98%

- NON-BHEL 414037 499236 85199 20.58%

TOTAL TURNOVER 414816 500342 85526 20.62%

CHANGES IN WIP 10637 49447 38810 364.86%

CHANGES IN FG 4938 -9622 %

EXPORT INCENTIVES 1112 690 -422 -37.95%

GROSS TURNOVER 431503 540857 109354 25.34%

EXCISE DUTY 24537 16859 -7678 -31.29%

GTO LESS ED 406966 523998 117032 28.76%

DIRECT MATERIALS 259592 340315 86723 33.41%

SUB-CONTRACT

PAYMENT978 1356

378 38.65%

POWER AND FUEL 1925 1746 -169 -8.78%

TRANSFER IN SERVICE 1347 806 -541 -40.16%

TOTAL OF `C' 263842 344223 80381 30.46%

VALUE ADDED 143124 179775 36651 25.61%

PERSONNEL PAYMENTS 58365 62236 3871 6.63%

INDIRECT MATERIALS 4560 3902 -658 -14.43%

OTHER EXPENSES -BHEL 6436 7101 665 10.33%

OTHER EXPENSES - NON

BHEL15402 26301

10899 70.76%

PROVISIONS 142 -226

PROV.EXCH.VAR. -324 894

Page 59: A Project Report on Financial Statement Analysis

LESS:MISC.INCOME 13913 11522 -2391 -17.18%

TOTAL OF `E' 70668 88686 18018 25.50%

GROSS MARGIN (PBIDT) 72456 91089 18633 25.72%

DEPRECIATION 3978 4606 628 15.79%

DRE ON VRS     0

GROSS PROFIT (PBIT) 68478 86483 18005 26.29%

INTEREST -6826 -7101

PROFIT BEFORE TAX 75304 93584 18280 24.27%

GTO LESS ED 406966 523998 117032 28.76%

0

OPERATING COST 338382 404647 66265

Comparative income statement 2007-2008 and 2008-09

Page 60: A Project Report on Financial Statement Analysis

comparative income statement

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DESCRIPTION

 2007-

082008-09

Increase /

Decrease

Increase /

decrease %

     

TURNOVER- BHEL 667 779 112 16.79%

- NON-BHEL 309568 414037 104469 33.74%

TOTAL TURNOVER 310235 414816 104581 33.71%

CHANGES IN WIP 17781 10637 -7108 -39.97%

CHANGES IN FG 4591 4938 347 7.56%

EXPORT INCENTIVES 2283 1112 -1171 -51.29%

GROSS TURNOVER 334890 431503 96613 28.85%

EXCISE DUTY 27236 24537 -2699 -9.91%

GTO LESS ED 307654 406966 99312 32.28%

DIRECT MATERIALS 183845 259592 75747 41.20%

SUB-CONTRACT

PAYMENT790 978

188 23.80%

POWER AND FUEL 1840 1925 85 4.62%

TRANSFER IN SERVICE 1394 1347 -47 -11.93%

TOTAL OF `C' 187869 263842 75973 40.44%

VALUE ADDED 119785 143124 23339 19.48%

PERSONNEL PAYMENTS 36001 58365 22364 62.12%

INDIRECT MATERIALS 4039 4560 521 12.90%

OTHER EXPENSES -BHEL 6125 6436 311 5.08%

OTHER EXPENSES - NON

BHEL12848 15402

2554 19.88%

PROVISIONS 1805 142 -1663 -92.13%

PROV.EXCH.VAR. -1524 -324 %

LESS:MISC.INCOME 11746 13913 2227 18.96%

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TOTAL OF `E' 47548 70668 23120 48.63%

GROSS MARGIN (PBIDT) 72237 72456 219 0.303%

DEPRECIATION 3321 3978 657 19.78%

DRE ON VRS     0

GROSS PROFIT (PBIT) 68916 68478 -438 -0.64%

INTEREST -5870 -6826 %

PROFIT BEFORE TAX 74786 75304 518 0.69%

GTO LESS ED 307654 406966 99312 32.28%

0

OPERATING COST 234677 338382 103705 44.19%

FINDINGS

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1. The net working capital was Rs 91021 lac’s in 2000-2001. This decreased

to Rs 82663 lac’s in the year 2001-2002. In the year 2006-2007 the net

working capital is Rs 67193 lac’s.

2. The current ratio of BHEL was 2.41 in the year 2000-2001. There was

decrease in the ratio up to the year 2007-2008. The ratio is decreasing

year by year. But the BHEL is maintaining current ratio more than the

standard norms of 2.

3. The organization is able to maintain both current ratio and quick ratio

above the standard norms. i.e. the ideal current ratio for the concern is 2:1

and the quick ratio is 1:1 but the cash ratio is fluctuating.

4. The quick ratio of the organization is in decreasing trend year by year.

5. Investment in current assets has been increasing from Rs 155302 lacs in

2000-2001 to Rs 310002 in 2007-2008.

6. The inventory turnover ratio of BHEL is fluctuating i.e., showing

decreasing trend during the years 2000-2001 to 2003-2004. But there

onwards it has slowly increased till the financial year.

7. The debtors turnover ratio has decreased from the year 2001-2002 to

2002-2003. It was 2.10 in the year 2003-2004. There was decrease in

debtors turnover ratio till the financial year.

CONCLUSIONS AND SUGGESTIONS:

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1. The current ratio of BHEL is decreasing year by year . In the year 2000-

2001 it was 2.41 and during the year 2008-2009 it has gone down to 1.2

later in the next financial year 2009-2010 it has gone up to 1.46, so the

company should concentrate effectively on the management of Current

Assets and Current Liabilities.

2. The Net Working Capital of BHEL is good for almost in range for each

and every year. It is always in the ideal ratio for every organization.

3. The BHEL is using the moving average method in valuation of stock.

4. The debtors constitute nearly 50% of the Total Current Assets. For the

Company it is difficult to manage the accounts receivables. The company

should collect debts as quickly as possible.

5. The company has to exercise cost of control and cost of reduction

techniques to increase its profitability.

6. The debtors turn over ratio in 2005-2006 is 1.97. the ratio has increased

than previous years except for 2003-2004, which had 2.10. the decreasing

ratio shows the inefficient management. They should concentrate more on

the collection of the debts.

7. The return on investment ratio of the BHEL is 59.40 in 2005-2006. It has

increased when compared to previous year’s ratios. It is beneficial to

investors who are interested to know the profits earned by the company.

8. The investment in loans and advances should be minimized to possible

extent.

9. Effective internal control system should be established. So that it can

have control over all aspects of the company.

BIBILOGRAPHY:

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http://www.bhel.com/financial_information/index.php

http://www.studyfinance.com/lessons/workcap

www.bizsearchpapers.com

http://www.antiessays.com/free-essays/9076.html

http://www.bhelhyderabad.com/bhel_hyderabad_unit.htm

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

Financial Management –I M Pandey.

Accounting for Managers-Jelsy Joseph Kuppapally.

Financial statement analysis - Gokul Sinha.

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INTRODUCTION

INTRODUCTION

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The main aim of the project is to study the capital budgeting process in the company.

In order to run the industry or company it requires machinery and other assets. To seek

machinery and other assets the company must spend or invest some money in order to buy

them. Before investing money on the machinery, the company need to evaluate the future

returns on the machinery, its depreciation value per year etc, then the company after going

through the above information, it will decide whether to invest on that particular machinery

or not. So, studying all this information comes under the title “CAPITAL BUDGETING” it

deals with evaluation of various projects using different capital budgeting techniques like net

present value, internal rate of return, profitability index, rate of return. From these

calculations the company will find out the feasibility of project that is whether to take up the

project or not. Then, finally the company will decide up on the project.

DEFINITION OF CAPITAL BUDGETING:

Capital Budget may be defined as”the firm’s decision to invest its current funds most

efficiently in the long-term assets in anticipation of an expected flow of benefits over a series

of years. Therefore it involves a current outlay or series of outlay of cash resources in return

for an anticipated flow of future benefits. The long-term assets are those, which affect the

firm’s operations beyond the one year period. The firm’s investment decisions would

generally include expansion, acquisition, modernization and replacement of the long-term

assets.

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OBJECTIVES OF THE STUDY

Following are the objectives of the study

To understand the procedure followed in BHEL for Capital Budgeting.

To understand the schemes for which Capital Budgeting is done.

To study the various parameters for assessing the performance of the organization.

To offer suggestions based on the findings.

NEED OF THE STUDY :

To study the Capital Budgeting process in the company and to analyze the feasibility

of the various projects taken up by the BHEL company by using capital budget technique.

SCOPE OF CAPITAL BUDGETIG DECISION :

Mechanization of a process In order to reduce costs, a firm may intend to mechanize

its existing production process by installing machine. The future cash inflows on this

investment are the savings resulting from the lowered erating costs. The firm would be

interested in analyzing whether it is worth to install the machine.

Expansion decision : Every company want to expand its existing business. In order to

increase the scale of production and sale, the company may think of acquiring new

Machinery, addition of building, merger or takeover of another business etc. this all would

require additional investment which should be evaluated in terms of future expected earnings.

Replacement decision : A company may contemplate to replace an existing machine with a

latest model. The use of new and latest model of machinery may possibly bring down

operating costs and increase the production. Such replacement decision will take with help of

capital budgeting.

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Choice of equipment : A company needs an equipment to perform a certain process. Now a

choice can be made between semi- automatic or fully- automatic machine. Capital Budgeting

process helps a lot in such selections.

Product or process innovation The introduction of new product or a new process will

involve heavy expenditure and will earn profits also in the future. So, a study of capital

budgeting will be very useful and the ultimate decision will depend upon the profitability of

the product or process.

LIMITATIONS OF THE STUDY

1. The procedures involved in Energy sector for the Capital Budgeting may vary

accordingly. Hence the suggestions cannot be generalized.

2. The study is based on the financial data provided by the finance personnel of

the company and other reliable sources.

RESEARCH METHODOLOGY

Research is a processing which the researchers wish to find out the end result for a

given problem and thus the solution helps in future course of action. The research has been

defined as A careful Investigation or enquiry especially through search for new facts in

branch of knowledge. The present study involves the analysis of data by using various

Capital Budgeting techniques like :

NPV

PI

ROI

IRR

RESEARCH DESIGN

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The research design used in this project is Analytical in nature the procedure using,

which researcher has to use facts or information already available, and analyze these to

make a critical evaluation of the performance.

DATA COLLECTION

Primary Sources

1. Data are collected through personal interviews and discussion with

Finance executives.

2. Data are collected through personal interviews and discussion with

Material Planning - Deputy Manager.

Secondary Sources

1. From the annual reports maintained by the company.

2. Data are collected from the company’s website.

3. Books and journals pertaining to the top.

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REVIEW OF LITERATURE

CAPITAL BUDGETING

MEANING OF A BUDGET:

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A budget is the monetary or/and quantitative expression of business plans and policies

to be pursued in the future period of time. The term budgeting is used for preparing budgets

and other procedures for planning, co-ordination and control of business enterprise.

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”. In the words of Crown and Howard, “A

budget is a pre-determined statement of management policy during a given period which

provides a standard for comparison with the results actually achieved.”

The actual performances of the past, the present situation and likely trends in the

future are considered while preparing budgets.

CLASSIFICATION AND TYPES OF BUDGETS:

The budgets are usually classified according to their nature. The following are the

types of budgets which are commonly used.

(A)CLASSIFICATION ACCORDING TO TIME

1. Long-Term budgets.

2. Short-Term budgets.

3. Current budgets.

(B) CLASSIFICATION ON THE BASIS OF FUNCTIONS

1. Operating budgets.

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2. Financial budgets.

3. Master budgets.

(C) CLASSIFICATION ON THE BASIS OF FLEXIBILITY

1. Fixed budget.

2. Flexible budget.

(A) Classification according to time

1. Long Term Budgets. The budgets are prepared to depict long term planning of

the business. The period of long term budgets varies between five to ten years.

The long term planning is done by the top level management. Long time

budgets are prepared for some sectors of the concern such as capital

expenditure, research and development, long term finance; etc .These budgets

are useful for those industries where gestation period is long

Ex: machinery, electricity, engineering, etc.

2. Short-term budgets. These budgets are generally for one or two years and are

in the form of monetary terms. The consumers’ goods industries like sugar,

cotton, textile, etc. use short term budgets.

3. Current Budgets. The period of current budgets is generally of months and

weeks. These budgets relate to the current activities of the business.

(B) Classification on the basis of functions

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1. Operating Budgets. These budgets relate to the different activities or

operations of a firm. The number of such budgets depends up on the size and

nature of business. The commonly used operating budgets are:

(a) Sales Budget

(b) Production Budget

(c) Production cost Budget

(d) Purchase Budget

(e)Raw material Budget

(f) Labor Budget

(g) Plant utilization Budget

(h) Manufacturing Expenses or works overhead budget

(i) Administrative and selling expenses Budget.

2. Financial budgets. Financial budgets are concerned with cash receipts and

disbursement, working capital, capital expenditure, financial position and

results of business operations. The commonly used financial budgets are:

(a) Cash Budget.

(b) Working capital Budget.

(c)Capital expenditure Budget

(d) Income statement Budget

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3. Master Budget. In this type of budget various functional budgets are integrated

into master budget.

(C) Classification on the basis of flexibility

1. Fixed budget. The fixed budgets are prepared for a given level of activity; the

budget is prepared before the beginning of the financial year. If the financial year

starts in January then the budget will be prepared a month or two months earlier

either in Nov or Dec. The changes in expenditure arising out of the anticipated

changes will not be adjusted in the budget. Fixed budgets are suitable under static

conditions.

2. Flexible budgets. A flexible budget consists of a series of budgets for different

level of activity. It varies with the level of activity attained. A flexible budget is

prepared after taking into consideration unforeseen changes in the conditions of

the business.

Some important budgets

1. Sales budget

2. Production budget

3. Cost of production budget

4. Materials budget

5. Direct labor budget

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6. Manufacturing overheads cost budget

7. Selling and distribution overhead budget

8. cost budget

9. Capital expenditure budget

10. Master budget

INTRODUCTION FOR CAPITAL BUDGETING:

A truck manufacturer is considering investment in a new plant; an airliner is planning

to buy a fleet of jet aircrafts; a commercial bank is thinking of an ambitious computerization

programme; a pharmaceutical firm evaluating a major R&D programme.

All these situations involve a capital expenditure decision. Essentially each of them

represents a scheme for investing resources which can be analyzed and appraised reasonably

independently.

The basic character of a capital expenditure is that it typically involves a current

outlay of funds in the expectation of a stream of benefits extending far into future.

This definition of capital expenditure is not necessarily synonymous with how capital

expenditure is defined in accounting. A capital expenditure from the accounting point of view

is an expenditure that is shown as an asset on the balance sheet. This asset, except in the case

of a non-depreciable asset like land, is depreciated over its life. In accounting, the

classification of an expenditure as capital expenditure or revenue expenditure is governed by

certain conventions, by some provisions of law, and by the management’s desire to enhance

or depress reported profits.

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Capital budgeting is a process of planning expenditures incurred on assets whose cash flow is

expected to range beyond one year. In other words, it is defined as a process that requires

planning for setting up budgets on projects expected to have long-term implications. It can be

used for processes such as the purchase of new equipment or launching of a new product in

the market. Businesses prefer to intricately study a project before taking it on, as it has a great

impact on the company's financial performance.

Some of the projects that use capital budgeting are investments in property, plants, and

equipment, large advertising campaigns, and research and development projects.

The success of a business depends on the capital budgeting decisions taken by the

management. The management of a company should analyze various factors before taking on

a large project. Firstly, management should always keep in mind that capital expenditures

require large outlays of funds. Secondly, firms should find modes to ascertain the best way to

raise and repay the funds. The management should also keep in mind that capital budgeting

requires a long-term commitment.

The requirement for relevant information and analysis of capital budgeting has paved the way

for a series of models to assist firms in amassing the best of the allocated resources. One of

the oldest methods used is the payback model; the process determines the length of time

required for a business to recover its cash outlay. Another model, known as return on

investment, evaluates the project based on standard historical cost accounting estimates.

Popular methods of capital budgeting include net present value (NPV), discounted cash flow

(DCF), internal rate of return (IRR), and payback period.

While working with capital budgeting, a firm is involved in valuation of its business. By

valuation, cash flow is identified and discounted at the present market value. In capital

budgeting, valuation techniques are undertaken to analyze the impact of assets instead of

financial assets.

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The importance of capital budgeting is not the mechanics used, such as NPV and IRR, but is

the varying key involved in forecasting cash flow. The importance of capital budgeting is not

only its mechanics, but also the parameters of forecasting the incurrence of cash in the

business

Capital budgeting is vital in marketing decisions. Decisions on investment, which take time

to mature, have to be based on the returns which that investment will make. Unless the

project is for social reasons only, if the investment is unprofitable in the long run, it is unwise

to invest in it now.

Often, it would be good to know what the present value of the future investment is, or how

long it will take to mature (give returns). It could be much more profitable putting the

planned investment money in the bank and earning interest, or investing in an alternative

project.

Typical investment decisions include the decision to build another grain silo, cotton

gin or cold store or invest in a new distribution depot. At a lower level, marketers may wish

to evaluate whether to spend more on advertising or increase the sales force, although it is

difficult to measure the sales to advertising ratio.

The key function of the financial management is the selection of the most profitable

assortment of capital investment and it is the most important area of decision-making of the

financial manger because any action taken by the manger in this area affects the working and

the profitability of the firm for The need of capital budgeting can be emphasised taking into

consideration the very nature of the capital expenditure such as heavy investment in capital

projects, long-term implications for the firm, irreversible decisions and complicates of the

decision making. Its importance can be illustrated well on the following other grounds:-

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(1) Indirect Forecast of Sales. The investment in fixed assets is related to future sales of the

firm during the life time of the assets purchased. It shows the possibility of expanding the

production facilities to cover additional sales shown in the sales budget. Any failure to make

the sales forecast accurately would result in over investment or under investment in fixed

assets and any erroneous forecast of asset needs may lead the firm to serious economic

results.

(2) Comparative Study of Alternative Projects Capital budgeting makes a comparative

study of the alternative projects for the replacement of assets which are wearing out or are in

danger of becoming obsolete so as to make the best possible investment in the replacement of

assets. For this purpose, the profitability of each project is estimated.

(3) Timing of Assets-Acquisition. Proper capital budgeting leads to proper timing of assets-

acquisition and improvement in quality of assets purchased. It is due to ht nature of demand

and supply of capital goods. The demand of capital goods does not arise until sales impinge

on productive capacity and such situation occur only intermittently. On the other hand,

supply of capital goods with their availability is one of the functions of capital budgeting.

(4) Cash Forecast. Capital investment requires substantial funds which can only be arranged

by making determined efforts to ensure their availability at the right time. Thus it facilitates

cash forecast.

(5) Worth-Maximization of Shareholders. The impact of long-term capital investment

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decisions is far reaching. It protects the interests of the shareholders and of the enterprise

because it avoids over-investment and under-investment in fixed assets. By selecting the most

profitable projects, the management facilitates the wealth maximization of equity share-

holders.

(6) Other Factors. The following other factors can also be considered for its significance:-

(a) It assist in formulating a sound depreciation and assets replacement policy.

(b) It may be useful n considering methods of coast reduction. A reduction campaign may

necessitate the consideration of purchasing most up-to—date and modern equipment.

(c) The feasibility of replacing manual work by machinery may be seen from the capital

forecast be comparing the manual cost an the capital cost.

(d) The capital cost of improving working conditions or safety can be obtained through

capital expenditure forecasting.

(e) It facilitates the management in making of the long-term plans an assists in the

formulation of general policy.

(f) It studies the impact of capital investment on the revenue expenditure of the firm such as

depreciation, insure and there fixed assets.

Capital budgeting is very obviously a vital activity in business. Vast sums of money can be

easily wasted if the investment turns out to be wrong or uneconomic. The subject matter is

difficult to grasp by nature of the topic covered and also because of the mathematical content

involved. However, it seeks to build on the concept of the future value of money which may

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be spent now. It does this by examining the techniques of net present value, internal rate of

return and annuities. The timing of cash flows are important in new investment decisions and

so the chapter looks at this "payback" concept. One problem which plagues developing

countries is "inflation rates" which can, in some cases, exceed 100% per annum. The chapter

ends by showing how marketers can take this in to account.

Capital budgeting versus current expenditures

A capital investment project can be distinguished from current expenditures by two features:

a) Such projects are relatively large.

b) A significant period of time (more than one year) elapses between the investment

outlay and the receipt of the benefits..

As a result, most medium-sized and large organizations have developed special procedures

and methods for dealing with these decisions. A systematic approach to capital budgeting

implies:

a) the formulation of long-term goals

b) the creative search for and identification of new investment opportunities

c) classification of projects and recognition of economically and/or statistically dependent

proposals

d) the estimation and forecasting of current and future cash flows

e) a suitable administrative framework capable of transferring the required information to the

decision level

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f) the controlling of expenditures and careful monitoring of crucial aspects of project

execution

g) a set of decision rules which can differentiate acceptable from unacceptable alternatives is

required.

THE CLASSIFICATION OF INVESTMENT PROJECTS

a) By project size

Small projects may be approved by departmental managers. More careful analysis and Board

of Directors' approval is needed for large projects of, say, half a million dollars or more.

b) By type of benefit to the firm

an increase in cash flow

a decrease in risk

an indirect benefit (showers for workers, etc).

c) By degree of dependence

mutually exclusive projects (can execute project A or B, but not both)

complementary projects: taking project A increases the cash flow of project B

substitute projects: taking project A decreases the cash flow of project B.

d) By degree of statistical dependence

Positive dependence

Negative dependence

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Statistical independence.

e) By type of cash flow

Conventional cash flow: only one change in the cash flow sign

e.g. -/++++ or +/----, etc

Non-conventional cash flows: more than one change in the cash flow sign,

e.g. +/-/+++ or -/+/-/++++, etc.

THE ECONOMIC EVALUATION OF INVESTMENT PROPOSALS

The analysis stipulates a decision rule for investing in projects :

I) accepting or

II) rejecting

THE TIME VALUE OF MONEY

Recall that the interaction of lenders with borrowers sets an equilibrium rate of interest.

Borrowing is only worthwhile if the return on the loan exceeds the cost of the borrowed

funds. Lending is only worthwhile if the return is at least equal to that which can be obtained

from alternative opportunities in the same risk class.

The interest rate received by the lender is made up of:

i) The time value of money: the receipt of money is preferred sooner rather than later. Money

can be used to earn more money. The earlier the money is received, the greater the potential

for increasing wealth. Thus, to forego the use of money, you must get some compensation.

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ii) The risk of the capital sum not being repaid. This uncertainty requires a premium as a

hedge against the risk, hence the return must be commensurate with the risk being

undertaken.

iii) Inflation: money may lose its purchasing power over time. The lender must be

compensated for the declining spending/purchasing power of money. If the lender receives no

compensation, he/she will be worse off when the loan is repaid than at the time of lending the

money.

a) Future values/compound interest

Future value (FV) is the value in dollars at some point in the future of one or more

investments.

FV consists of:

i) the original sum of money invested, and

ii) the return in the form of interest.

The general formula for computing Future Value is as follows:

FVn = Vo (l + r)n

where

Vo is the initial sum invested

r is the interest rate

n is the number of periods for which the investment is to receive interest.

Thus we can compute the future value of what Vo will accumulate to in n years when it is

compounded annually at the same rate of r by using the above formula.

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CHARACTERISTICS OF CAPITAL BUDGETING:

Capital expenditures represent the growing edge of a business. Capital expenditures have

three distinctive features:

1. They have long-term consequences.

2. They often involve substantial outlays.

3. They may be difficult or expensive to reverse.

Capital budgeting is a most important issue in corporate finance. How a firm finances

its investments (the capital structure decision) and how it manages its short-term operations

are definitely issues of concern but how it allocates its capital (the capital budgeting decision)

really reflects its strategy and its business. That is why the process of capital budgeting is also

referred to as strategic asset allocation.

Most firms have numerous investment opportunities before them. Some are valuable

while others are not. The essence of financial management is to identify which are which.

DEFINITION OF CAPITAL BUDGETING:

Capital Budget may be defined as ”the firm’s decision to invest its current funds most

efficiently in the long-term assets in anticipation of an expected flow of benefits over a series

of years. Therefore it involves a current outlay or series of outlay of cash resources in return

for an anticipated flow of future benefits. The long-term assets are those, which affect the

firm’s operations beyond the one year period. The firm’s investment decisions would

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generally include expansion, acquisition, modernization and replacement of the long-term

assets.

IMPORTANCE

Capital budgeting decisions are most crucial and critical business decision and are

important due to the following reasons:

a. INVOLVEMENT OF HEAVY FUNDS :

Capital budgeting decisions require large capital outlays. It is therefore

absolutely necessary that the firm should be carefully plan its investment program

so that it may get the finances at the right time and they are put to most profitable

use.

b. LONG-TERM IMPLICATION

The firm will feel the effect of capital budgeting decisions over a long period,

and therefore they have a decisive influence on the rate and direction of the

growth of the firm.

c. IRREVERSIBLE DECISION:

In most cases these decisions are irreversible this is because it is very difficult

to find a market for the capital assets. The only alternative will be to scrap the

capital assets so purchase and sell them at substantial loss in the event of the

decision proved wrong.

d. FUTURE EVENTS:

The capital budgeting decisions require an assessment of future events which

are uncertain. It is really a difficult task to estimate the probable future event, the

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probable benefits and costs accurately in quantitative terms because of economic,

political, social, and technological factors.

e. IDENTIFY OPPORTUNITIES

As a business owner or entrepreneur, you are often presented with many

different potential opportunities. You could go in a number of different directions

as a company. The first step in the capital budgeting process is identifying which

opportunities are available to you at the time. Before you can make a decision he

have to know what is available first.

f. ASSESS OPPORTUNITIES

Once you have identified the possible opportunities for your business, the

next step in the process is to assess each opportunity individually. You to compare

each opportunity against your vision for the company and the mission statement.

Look at the values of each opportunity and see if they match with your own

values. Many of the potential opportunities can be eliminated in the step before

you can get into the financial information. You want only pursue opportunities

that match your business plan.

g. CASH FLOW ASSESSMENT

Another vital part of the capital budgeting process is cash flow assessment.

When looking at a new project, you to come up with a cash flow plan for it. You

need to estimate the amount of cash that will take to complete the project and how

much cash it will require going forward. This often requires the consultation of

several different experts. For example, if you are considering starting a new plant

for your business, you will need to consult with an architect and possibly a builder

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to determine how much it would cost. If building is not your expertise, do not rely

on guesstimates for your information.

The second part of the cash flow assessment process helps you determine

how much money are project could bring in. When calculating these numbers do

not ever use the best case scenario. Use numbers that are more realistic for your

assessment. This part of the process helps you determine whether the project is

viable or not.

h. MAKING DECISIONS

Ultimately, the objective of capital budgeting is to help you make

decisions that are smart for your business. Taking the necessary steps to evaluate

each opportunity can help you avoid disastrous consequences for your business. If

these steps are not taken, you can take on a project that does not bring any value to

your company. Ultimately, it could prove to be the last mistake your company

remakes. Therefore, the capital budgeting process is crucial to consider before

making any big decisions for any type of project.

The need of capital budgeting can be emphasized taking into consideration

the very nature of the capital expenditure such as heavy investment in capital

projects, long-term implications for the firm, irreversible decisions and

complicates of the decision making. Its importance can be illustrated well on the

following other grounds:-

The investment in fixed assets is related to future sales of the firm during

the life time of the assets purchased. It shows the possibility of expanding the

production facilities to cover additional sales shown in the sales budget. Any

failure to make the sales forecast accurately would result in over investment or

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under investment in fixed assets and any erroneous forecast of asset needs may

lead the firm to serious economic results.

Capital budgeting makes a comparative study of the alternative projects for

the replacement of assets which are wearing out or are in danger of becoming

obsolete so as to make the best possible investment in the replacement of assets.

For this purpose, the profitability of each projects is estimated.

Proper capital budgeting leads to proper timing of assets-acquisition and

improvement in quality of assets purchased. It is due to ht nature of demand and

supply of capital goods. The demand of capital goods does not arise until sales

impinge on productive capacity and such situation occur only intermittently. On

the other hand, supply of capital goods with their availability is one of the

functions of capital budgeting.

Capital investment requires substantial funds which can only be arranged

by making determined efforts to ensure their availability at the right time. Thus it

facilitates cash forecast.

The impact of long-term capital investment decisions is far reaching. It

protects the interests of the shareholders and of the enterprise because it avoids

over-investment and under-investment in fixed assets. By selecting the most

profitable projects, the management facilitates the wealth maximization of equity

share-holders.

The following other factors can also be considered for its significance:-

(a) It assist in formulating a sound depreciation and assets replacement policy.

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(b) It may be useful n considering methods of coast reduction. A reduction

campaign may necessitate the consideration of purchasing most up-to—date and

modern equipment.

(c) The feasibility of replacing manual work by machinery may be seen from the

capital forecast be comparing the manual cost and the capital cost.

(d) The capital cost of improving working conditions or safety can be obtained

through capital expenditure forecasting.

(e) It facilitates the management in making of the long-term plans an assists in the

formulation of general policy.

(f) It studies the impact of capital investment on the revenue expenditure of the

firm such as depreciation, insure and there fixed assets.

Capital rationing

Firms may have to choose among profitable investment opportunities because of the limited

financial resources. In this article we shall discuss the methods of solving the capital

budgeting problems under capital rationing. We shall show that the net present value is the

most valid section rule even under the capital rationing situations.

A firm should accept all investment projects with positive net present value in order to

maximize the wealth of shareholders. The net present value rule tells us to spend funds in the

projects until the net present value of the last project is zero.

Capital rationing refers to a situation where the firm is constrained for external, or self

imposed, reasons to obtain necessary funds to invest in all investment projects with positive

net present value. Under capital rationing, the management has not simply to determine the

profitable investment opportunities, but it has also to decide to obtain that combination of the

profitable projects which yields highest net present value within the available funds

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Capital rationing may rise due to external factors or internal constraints imposed by the

management. Thus there are two types of capital rationing.

External capital rationing

Internal capital rationing

External capital rationing

External capital rationing mainly occurs on account of the imperfections in capital markets.

Imperfections may be caused by deficiencies in market information, or by rigidities of

attitude that hamper the free flow of capital. The net present value (NPV) rule will not work

if shareholders do not have access to the capital markets. Imperfections in capital markets

alone do not invalidate use of the net present value (NPV) rule. In reality, we will have very

few situations where capital markets do not exist for shareholders.

Internal capital rationing

Internal capital rationing is caused by self imposed restrictions by the management. Various

types of constraints may be imposed. For example, it may be decide not to obtain additional

funds by incurring debt. This may be a part of the firm’s conservative financial policy.

Management may fix an arbitrary limit to the amount of funds to be invested by the divisional

managers. Sometimes management may resort to capital rationing by requiring a minimum

rate of return higher than the cost of capital. Whatever, may be the type of restrictions, the

implication is that some of the profitable projects will have to be forgone because of the lack

of funds. However, the net present value (NPV) rule will work since shareholders can borrow

or lend in the capital markets.

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It is quite difficult sometimes justify the internal capital rationing. But

generally it is used as a means of financial controls. In a divisional set up, the

divisional managers may overstate their investment requirements. One way of

forcing them to carefully assess their investment opportunities and set priorities is

to put upper limits to their capital expenditures. Similarly, a company may put

investment limits if it finds itself incapable of coping with the strains and

organizational problems of a fast growth.

Investment Decisions under Capital Rationing

Firms may have to choose among profitable investment opportunities

because of the limited financial resources. In this article we shall discuss the

methods of solving the capital budgeting problems under capital rationing. We

shall show that the net present value (NPV) is the most valid section rule even

under the capital rationing situations.

A firm should accept all investment projects with positive net present value (NPV)

in order to maximize the wealth of shareholders. The net present value (NPV) rule

tells us to spend funds in the projects until the net present value (NPV) of the last

project is zero.

Capital rationing refers to a situation where the firm is constrained for external, or

self imposed, reasons to obtain necessary funds to invest in all investment projects

with positive net present value (NPV). Under capital rationing, the management

has not simply to determine the profitable investment opportunities, but it has also

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to decide to obtain that combination of the profitable projects which yields highest

net present value (NPV) within the available funds.

CAPITAL BUDGETING PROCESS

Capital Budgeting is a complex process, which may be divided into the following

phases

They are :

Identification of potential investment opportunities.

Assembling of proposed investment.

Decision making.

Preparation of capital budget and appropriation.

Implementation.

Performance review.

Identification of potential Investment opportunities :

The capital budgeting process begins with the identification of potential

investment opportunities. Typically, the planning body (it may be an individual or a

committee organized formally or informally) develops estimate of future sales which

serves as the basis for setting production targets. This information in turn is helpful in

identifying required investments for the project.

Assembling of investment proposals :

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Investment proposals identify by the production department and other

department is usually submitted in a standardized capital investment proposal firm.

Generally most of the proposals before they reach capital budgeting committee or

somebody who assembles them are routed through several persons. The purpose of

routing proposal through several persons is primarily to ensure that the proposal is

viewed from different angles. It also helps in creating for bringing about co-ordination

of interrelated activities.

Decision Making :

A system of rupee gateways usually characterizes capital investment decision

making. Under this system the executives are vested with the power to act the

investment proposals up certain limits. Investment requiring higher outlays needs the

approval of the board of directors.

Preparation for capital budget and appropriation :

Project involving smaller outlays, and which can decided by executives at

lower level, are often covered by a blanker appropriation for expeditions actions.

Project requiring larger outlays are included in the capital budget after necessary

approval. Before undertaking such projects, an appropriation order is usually required.

The purpose of this check is mainly to ensure that the funds position of the firm is

satisfactory at the time of implementation.

Implementation :

Translating an investment proposal into a concrete project is a complex, time

consuming and risk task. Delay in implementation, which is common can lead to

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substantial cost overruns. For expeditions implementations at a reasonable cost the

following are helpful.

Adequate formulation of projects.

Use of the principle of responsibility accounting.

Use of the network techniques.

Performance review :

Performance review or post completion audit is a feedback device. It is a

means of comparing the actual performance which projected performance.

PROJECT CLASSIFICATION :

Project analysis entails time and effort. The costs incurred in this exercise must be

justified by the benefits from it. Certain projects, given their complexity and magnitude,

may warrant a detailed analysis; others may call for a relatively simple analysis. Hence

firms normally classify projects in to different categories. Each category is then analyzed

somewhat differently.

While the system of classification may vary from one firm to another, the following

categories are found in most classifications.

MANDATORY INVESTMENTS :

These are expenditures required to comply with statutory requirements. Examples of

such investments are pollution control equipment, medical dispensary, firefighting

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equipment, crèche in factory premises, and so on. These are often non-revenue producing

investments. In analyzing such investments, the focus is mainly on finding the most cost-

effective way of fulfilling a given statutory need.

REPLACEMENT PROJECTS :

Firms routinely invest in equipments meant to replace obsolete and inefficient

equipments, even though they may be in a serviceable condition. The objective of such

investments is to reduce costs (of labor, raw material and power), increase yield, and

improve quality. Replacement projects can be evaluated in a fairly straightforward manner,

though at times the analysis may be quite detailed.

EXPANSION PROJECTS :

These investments are meant to increase capacity and/or widen the distribution

network. Such investments call for an explicit forecast of growth. Since this can be risky

and complex, expansion projects normally warrant more careful analysis than replacement

projects. Decisions relating to such projects are taken by the top management.

DIVERSIFICATION PROJECTS :

These investments are aimed at producing new producing new products or services

or entering into entirely new geographical areas. Often diversification projects entail

substantial risks, involve large outlays, and require considerable managerial effort and

attention. Given their strategic importance, such projects call for a very thorough

evaluation, both qualitative and quantitative. Further they involve board of directors.

RESEARCH AND DEVELOPMENT PROJECTS :

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Traditionally, R&D projects absorbed a very small proportion of capital budget in

most Indian companies. But now the companies are now allocating more funds to R&D

projects, more so in knowledge-intensive industries. R&D projects are characterized by

numerous uncertainties and typically involve sequential decision making. So, such projects

are decided on the basis of managerial judgment. Firm which rely more on quantitative

methods use decision tree analysis and option analysis to evaluate R&D projects.

MISCELLANEOUS PROJECTS :

This is a catch-all category that includes items like interior decoration, recreational

facilities, executive aircrafts, landscaped gardens, and so on. There is an standard approach

for evaluating these projects projects and decisions regarding them are based on personal

preferences of top management.

INVESTMENT CRITERIA :

Investment criteria are divided into two. They are

1. Discounting criteria

2. Non-discounting criteria

Again each of them is divided into various categories:

1. Discounting criteria

a. Net present value

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b. Benefit cost ratio

c. Internal rate of return

2. Non-discounting criteria

a. Payback period

b. Accounting rate of return

A wide range of criteria has been suggested to judge the worth whileness of

investment projects. The important investment criteria, classified into two broad categories

i.e non-discounting criteria and discounting criteria.

CAPITAL BUDGETING IN PUBLIC SECTOR UNDERTAKINGS

The distinctive feature of capital budgeting in public sector undertakings is that the

boards of these enterprises are empowered to sanction capital expenditures with in certain

limits which are reviewed time to time. Capital expenditures involving larger outlay have to

be approved by the higher echelons in the government.

ROLE OF PUBLIC INVESTMENT BOARD

The Public Investment Board (PIB) set up in 1972 presently plays a pivotal role in

the appraisal and sanction of capital projects of public enterprises. The PIB is

headed by the secretary, Expenditure. Its other members are the secretaries to he

planning commission, Department of Economic affairs prime minister, Department

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of public Enterprises, Ministry of Industrial Development, and the Administrative

Ministry bringing up the investment proposal before the board.

GUIDELINES PROVIDED BY THE GOVERNMENT

For almost 15 years since the commencement of the planned era, no guidelines

or manuals were provided by the central government or the planning commission to

public sector undertakings or their administrative ministries, for the preparation of

any feasibility report and detailed project report. In 1966,for the first time, the

planning commission issued a Manual on feasibility studies. Among other things,

this manual:

1. Suggested the use of various criteria like return on investment , payback period,

net present value, and internal rate of return for measuring profitability ;

2 . Laid stress on the use of net present value to be calculated at a discount rate of

12 percent, with a mention that different discount rates may have to be used for

different projects;

3. Emphasized the need for analysis of risk, though it did not suggest any

particular method for doing so; and

4. Underscored the need for assessing the ‘national economic benefits ‘from the

project.

A more comprehensive manual entitled guidelines for the preparation of

feasibility reports for industrial projects was issued in 1975 by the Project

Appraisal division of the planning commission. The Guidelines suggest that

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projects should be appraised from the technical, commercial, financial, and

economic angles, without specifying the modes of such analysis.

The following sequence of presentation has been suggested :

1. General information on alternatives

2. Preliminary analysis

3. Project description

4. Market analysis

5. Capital requirements and costs

6. Operating requirements and costs

7. Financial analysis

8. Social profitability analysis

In the Guidelines emphasis has been placed on the internal rate of return method

as against the net present value method that was recommended by the Manual

issued in 1996.

CAPITAL BUDGETING TECHNIQUES

A number of investment criteria or capital budgeting techniques are in use or in

practice.

They may be grouped into following categories :

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1. Discounted cash flows or time adjusted

a. Net present value

b. Internal rate of return

c. Profitability index

2. Non-discounting cash flows or Traditional

a. Payback period

b. Accounting rate of return

1. Discounted cash flows

a. Net present value:

The Net present value method is the classic economic method of evaluating

the investment proposals. It is a discounted cash flow technique that explicitly

recognizes the time value of money. It correctly postulates that cash flows arising at

different time periods differ in value and are comparable only when their equivalent

present values are found out.

The exercise involved in calculating the present value is known as Discounting

and the factors by which we have multiplied the cash flows are known as discount

factors. The discount factors is given by the following expression.

PVF=1/(1+r)n

Where ‘r’ is the rate of interest per annum and ‘n’ is the number of years over which we are

discounting.

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n

NPV of Project = ∑ Ct – Initial Investment

t=1 (1+r)t

Ct= cash flow at the end of year t

n= life of the project

r= discount rate

properties of the NPV Rule

The net present value has certain properties that make it a very attractive decision

criterion.

NET PRESENT VALUES ARE ADDITIVE :

Because present values are measured in today’s rupees they can be added. This means that if

you have two projects a and b, the net present value of the combined investment is

NPV (a+b) =NPV(a)+NPV(b)

The net present value of a package of projects is simply the.sum of the net present values of

the individual projects included in the package.

These properties has several implications:

The value of a firm can be expressed as sum of the present value of the projects in

place as well as the net present value of prospective projects.

Value of a firm =∑Present value of projects +∑NPV of expected future projects.

The first term on the right hand side of this equation capture the value of assets in

place a and the second term the value of growth opportunities.

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When a firm terminates an existing project which has a negative NPV based on its

expected future cash flows, the value of the firm increases by that amount. Likewise,

when a firm undertakes a new project that has a negative NPV, the value of the firm

decreases by that amount.

When a firm divests itself of an existing project, the price at which the project is

divested affects the value of the firm. If the price is greater/lesser than the present

value of the anticipated cash flows of the project the value of the firm will

increase/decrease with the divestiture .

When a firm takes on a new project with a positive NPV, its effect on the value of the

firm depends on whether its NPV is in line with expectation. Example Hindustan

Lever Limited, is expected to take on high positive NPV projects and this expectation

is reflected in its value. Even if the new projects taken on by Hindustan Lever

Limited have positive NPV, the value of the firm may drop if the NPV is not in line

with high expectation of investors.

When a firm makes an acquisition and pays a price in excess of the present value of

the expected cash flows from the acquisition it is like taking on a negative NPV

project and hence will diminish the value of the firm.

INTERMEDIATE CASH FLOWS ARE INVESTED AT COST OF CAPITAL

The NPV rule assumes that the intermediate cash flows of a project-that is, cash flows that

occur between the initiation and termination of the project- are reinvested at a rate of return

equal to the cost of capital.

ACCEPTANCE RULE:

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The acceptance rule under the NPV method is “accept the proposal if its NPV is positive and

reject the proposal if the NPV is negative “. The positive NPV of a proposal signifies that the

present worth of its in flows is more than the present worth of its outflows. Thus the NPV

represents the excess of benefits over the cost in real term. The NPV therefore, is the change

expected in the wealth of the shareholder because of the acceptance of a particular proposal

in the wealth of the shareholder because of the acceptance of a particular proposal in the case

of ranking of mutually exclusive proposals, the proposals with the highest positive NPV is

given the top priority and the proposals with the lowest priority. The proposals with the

negative NPV ought to rightly be rejected.

MERITS:

It recognizes the time value of money.

It considers the total benefits arising out of the proposal over its lifetime.

The future discount rate normally varies due to long span. They can be applied in calculating

the NPV by altering the denominator.

This method is particularly useful for selection of mutually exclusive projects.

This method of project selecting is instrumental in achieving the financial objectives i.e; the

maximization of shareholder wealth.

DEMERITS:

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It is difficult to calculate as well as understand it as compared to accounting rate of

return method or payback period method.

Calculation of the desired rate of return presents serious problems. Generally cost of

capital is the basis of determining the desired rate. The calculation of cost of capital is

itself complicated .Moreover, desired rate of return will vary from year to year.

This method is an absolutely measure .When two projects having different effective

lives are being compared. Normally, the project with shorter economic life is

preferred.

INTERNAL RATE OF RETURN:

The internal rate of return (IRR) of a project is the discount rate which makes its NPV equal

to zero. Internal rate of return is a percentage discount rate used in capital investment appraisal, which

bring the cost of a project and its future cash inflows into equality. It is the rate of return which

equates the present value of anticipation net cash flows with the initial outlays. The IRR is defined as

the rate which the net present value is zero. The test of profitability of unity a project is relationship

Relationship between the internal rate of return of the project and the minimum

acceptable rate of return.

ACCEPTANCE RULE:

The accept-or-reject rule, using the IRR method, is to accept the project if its internal

rate of return is higher than the opportunity cost of capital (r>k). ‘k’ is also known as required

rate of return , or the cut-off, or hurdle rate. The project shall be rejected if its internal rate of

return is lower than the opportunity cost of capital (r>k). The decision maker may remain

indifferent if the internal rate of return is equal to the opportunity cost of capital.

MERITS:

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It recognizes the time value of money.

It considers the total benefits arising out of proposals over its lifetime.

The future discount rate normally varies due to longer time span. This rate

can be

This method is particularly useful for the selection of mutually exclusive

projects.

The method of project selection is instrumental in achieving the financial

objectives i.e; the maximization of shareholders wealth.

DEMERITS:

It is difficult to calculate as well as to understand it as compared to accounting

rate of return method, or payback period method.

Calculation of the desired rate of return present serious problems generally cost of

capital is the basis of determining the desired rate.

The calculation of cost of capital is itself complicated. Moreover desired rate of

return vary from year to year.

PROFITABILITY INDEX :

The profitability index is also called benefit cost ratio. The profitability index is the

present value of anticipated net future cash flows divided by the initial outlay. The only

difference between the net present value method and profitability index method is that when

using the NPV technique, the initial outlay is deducted form the present value of anticipated

cash flows, whereas with profitability index approach, the initial cash outlay is used as

divisor.

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PI = PV of cash inflow / initial cash investment

PAYBACK PERIOD :

The payback period is usually expressed in years it takes the cash inflow from a

capital investment project to equal to cash outflow. When deciding between two and more

competing projects the usual decision is to accept the one with the shortest payback. This

method recognizes the recovery of the original capital invested in a project. The basic

element of this method is a calculation of recovery time, by accumulation of the cash inflows

year by year until the cash inflows equal to the amount of the original investment. In simple

terms, it can be defined as the number of years required to recover the cost of the investment.

MERITS :

It is simple to apply and easy to understand.

In case of capital rationing a company is compelled to invest in projects having

shortest payback period.

This method is most suitable when the future is every uncertain. The shorter the

payback period, the less risky is the project.

This method gives an indication to the prospective investor specifying when their

funds are likely to be repaid.

It does not involve assumptions about future interest rates.

DEMERITS :

It ignores the cash generation beyond the payback period.

It fails to take into account the timings of returns and the cost of capital. It fails to

consider the whole lifetime of the projects.

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It does not indicate whether an investment should be accepted or rejected, unless the

payback period is compared with an arbitrary managerial target.

ACCOUNTING RATE RETURN :

The ARR method is also known as return on investment or return on capital

employed. This method employs the normal accounting technique to measure the increase in

profit expected to result from an investment by expressing the net accounting profit arising

from the investment as a percentage of that capital investment.

ARR = Avg profit after tax / Avg investment * 100

ACCEPTANCE RULE :

As an accept – or – reject criterion, this method will accept all those projects which

have ARR less than the minimum rate. This method would rank a project as number one if it

has highest ARR and lowest rank would be assigned to the project with lowest ARR.

MERITS :

1. It is easy to calculate because it makes use of readily available accounting

information.

2. It is not concerned with the cash flows but rather based upon profits, which are

reported in annual accounts and sent to shareholders.

3. Unlike payback period method, this method takes into consideration all the years

involved in the life of the project.

4. Where a number of capital investment proposals are being consider, a

quick decision can be taken by use of ranking the investment proposals.

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CAPITAL BUDGETING IN BHEL

The capital budgeting in BHEL is based on capital budget manual, which covers the

following aspects.

1. Capital funds budget

Five – year plan

Annual plan exercise

Non – plan budget exercise

Feasibility report

2. Progress reporting and monitoring

3. Replacement guidelines

4. Government guidelines

Capital Fund Budget :

Capital funds budget is what enables a program of action on all capital expenditure

items to be grouped in one consolidated document. This outlines the proposal for creation of

new assets addition for increase in production, diversification and reduction of coast ensures

how these ventures will be financed over a given period, it includes five years plan, annual

plan exercise and non-plan budget exercise, which are described below.

Five - Year Plan :

The government has been formulating five years plans for the economic growth.

Inline with this policy, BHEL also formulates the five years plans of the company and

submits to the government for inclusion in every five years plan of the county.

Five year plan exercise normally starts from the third year of the previous five years plan.

The schemes included in the plan approved by planning commission are prioritized for

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implementation depending on the need resources etc., these schemes should be inline with

perspective plan of the country.

Annual Plan Exercise :

The capital funds budget annual plan is meant for making provisions for cash

expenditure of capital nature including the foreign exchange component where ever

necessary.

1. Revised estimate for current year.

2. Budget estimates for the ensuring year i.e., budget year.

3. Preliminary budget estimates for year following the budget year.

Non Plan Budget Exercise :

All expenditure on capital equipment like cranes, material heading equipment, special

tools and plant equipment, which are required at project sites for erection and commissioning

purpose etc., should be considered as non-plan expenditure.

Feasibility Report :

Guidelines for preparation of feasibility report. For every investment a detailed

feasibility report is required to be formulated for approval of the competent authority. The

feasibility report must spell out in detail the following…

Objective of the scheme / project .

Consistency with the company plans / policies.

Inputs required and their phasing.

Financial / economic analysis.

Implementation plan.

Expansion program in future if any.

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Progress Reporting Monitoring :

Once the capital budget has been approved it has to be ensuring the targets laid down

regarding physical and financial progress adhered to. Any short fail in this regard is likely in

delay the completion of project and ultimately affects production program. Therefore each

project is continuously monitored at divisional level both physically and financially. For

major projects consisting more than five cores. Projects review committees are required to be

consisted having representatives from project unit and corporate office. Those committees

should met periodically to review the progress and recommenced, taking corrective action.

Replacement Guidelines :

Substantial investments have been made in the plant and machinery in all the BHEL

manufacturing divisions. Though modernization and expansion programs, new machine tools

have been added from time to time. New projects are underway increasing investments in

plant and machinery still to higher level.

Replacement of plant and machinery are needed for the following reasons.

Due to natural wear and tear .

Technological obsolescence.

Change in service requirement.

Accident.

Government Guidelines :

Reference has been made in various government manual containing guidelines / policies, which are

relevant for the capital budgeting exercise within BHEL and with other government.

PROCEDURE FOR CAPITAL BUDGETING IN BHEL

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The capital budgeting in BHEL has in four phase, which can be explained as

follows….

First Phase :

This phase involve the different aspects in approval of the proposals put forth but the

department concerned. The different steps involved are…

1. A letter of requisition with the proposal is sent by the concerned department to the

R&D department. This letter contains the specification of items in the case of

replacement the need for the replacement is to be clearly specified along with the cost

estimates.

2. This proposal is forward to finance department, industrial engineering and

maintenance and services department for their consent.

3. Finance department looks into financial aspects of the proposals.

4. Industrial engineering department cheeks whether the specifications are apt of the

proposal.

5. Maintenance and service department consent.

Second Phase :

1. The department which has sent the proposal gives the 100% specifications to the

purchase department.

2. The purchase department lists the supplies and quotations are invited.

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3. After the quotations are received the proposal with the lowest cost is opted for, ask

keeping the quality of the item.

4. The item is then ordered.

5. The item ordered will received by the stores department.

6. The items would unpacked by the stores department and physical defects are checked.

7. If the item is satisfactory, it is installed in fright place.

Third Phase :

1. A representative of the supplier gives the demonstration with respect to the technical

aspects and usage of item.

2. The item is then put to use.

3. From time to time, steps are taken for its proper maintenance.

Forth Phase :

1. If the machines worn out or obsolete, it is disposed off the replacement.

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PROFILE OF ORGANIZATION

INDUSTRY PROFILE

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BHARATH HEAVY ELECTRICAL LIMITED

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The vital role played by the BHEL today in the country is the mark of its continuous

efforts to improve the service in the nation by consultancy, manufacturing and offering

services in power sector.

This success story of BHEL however goes back to 1956 when its first plant was set up

in BHOPAL. Three more major plants in HARIDWAR, HYDERABAD and

TIRUCHINAPALLI follow. These plants have been the core of BHEL’s efforts to grow and

diversify and become one of the most integrated power and industrial equipment

manufacturers in the world. The company now has 14 manufacturing units, 8 service centers

and 4 power sector regional centers, besides project sites spread all over India and abroad.

BHEL manufactures over 180 products under 30 major product groups and meets the

needs of core sector like power, industry, transmission, defense, telecommunications, oil

business etc. Its products have established an enviable reputation for high quality and

reliability. This is due to the emphasis placed all along on design, engineering and

manufacturing to international standards by acquiring and adopting some of the best

technologies developed in its own R&D centers. BHEL caters to the needs of different

sectors by designing and manufacturing according to the need of its clients in power sector.

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INDUSTRIAL SECTOR :

BHEL contributes major capital equipment and systems like captive power plants

centrifugal compressors, drive turbines, heavy castings and forging etc.

Capacitors

Compressors

Diesel generating sets

Industrial motors and alternators

Gas turbines

Steam generators

Steam turbines

TRANSMISSION SECTOR:

BHEL also produces high voltage transformer an SF6 switch gears up to 400KV.

India’s first indigenous 145KV gas insulated switch gear was developed and commercialized

by BHEL. It consists of the following.

Capacitors

Control relay panels

Dry-type transformers

Energy meters

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Insulators

Switch gears

Power semiconductor devices

Power system studies

OIL SECTOR:

BHEL has been supplying onshore drilling rigs, X-MAS tree valves and wellheads up

to a rating of 1000 PSI to ONGC and OIL India. It can also supply subsea wellheads, super

deep drilling rigs, desert rigs and hebi rigs.

TRANSPORTATION SECTOR:

Most of the trains in the Indian railways are equipped with BHEL’s traction and

traction control equipment. India’s first underground metro at Calcutta runs on drives and

controls supplied by BHEL. The company also manufactures broad gauge 3900HP AC

locomotives, 5000/4600HP AC/DC locomotives. BHEL has acquired the technology for 3

phase electrics for 6000HP AC locomotives.

NON CONVENTIONAL ENERGY :

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Mini/Micro hydro sets

Solar lanterns

Solar photovoltaic’s

Solar water heating system

Wind electric generators

TELECOMMUNICATION:

BHEL also manufactures MAX-XL systems based on C DOT technology and plans to make

other range of telecommunication equipment as well.

STEAM TURBINES

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BHEL has the capability to design, manufacture and commission steam turbines of up to 100

MW rating for steam parameters ranging from 30 bars to 300 bars pressure and initial &

reheat temperatures up to 600 0 C. Steam Germany covering the whole range of requirements

for Drive, Cogeneration, Captive Power, Utility and Combined Cycle applications BHEL

today is fully equipped to provide comprehensive service to clients covering system

engineering, equipment design and turnkey erection and commission.

STEAM TURBINES

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BHEL presently has manufactured Turbo-Generators of ratings upto 560 MW and is in the

process of going upto 660 MW. It has also the capability to take up the manufacture of

ratings up to 1000 MW suitable for thermal power generation, gas based and combined cycle

power generation as-well-as for diverse industrial applications like Paper, Sugar, Cement,

Petrochemical, Fertilizers, Rayon Industries, etc, Based on proven designs and know-how

backed by over three decades of experience and accreditation of ISO 9001, the Turbo-

generator is a product of high-class workmanship and quality. Adherence to stringent quality-

checks at each stage has helped BHEL, to secure prestigious global orders in the recent past

from Malaysia, Malta, Cyprus, Oman Iraq, Bangladesh, Sri Lanka and Saudi Arabia.

The successful completion of the various export projects in a record time is a testimony of

BHEL’s performance.

PUMPS

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BHEL started manufacture of Pumps during the mid-sixties under technical collaboration

with M/s Sigma Lutin, Czechoslovakia, to meet the requirements of 60 MW, 110 MW and

210 MW thermal power stations, the scope of which was widened to meet the requirements

of power plants up to 500 MW, with the help of another collaboration with M/s Weir Pumps,

U.K. BHEL has also made some in-house product development to gain spin off benefits from

the above collaboration as well as to develop new pumps to meet the requirements of

Combined Cycle Power plants.BHEL has undertaken a design up-gradation and retrofit of the

existing 200 KHI Boiler Feed pumps Inside Stators with energy efficient hydraulics and

cartridge design internals under technical tie-up with M/s Sulzer Pumps, Germany, and

recommended the upgraded 200 KHI-S Boiler Feed pump to all customers of 110 MW & 210

MW Power Stations operating with the earlier Czech design for increase of pump availability

and reliability and also considerable reduction in operational costs.

PULVERIZERS

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BHEL manufactures mills for pulverized coal fired Thermal and Industrial boilers, BHEL till

date has manufactured over 1200 bowl mills and over 100 tube mills, operating in different

coal fired Thermal power stations in India.

BHEL has absorbed technology from world leader M/s. Combustion Engineering USA for

bowl mills. The specific range – 583 XRP/XRS to 1043 XRP covers the-state-of-the-art mills

required for the India market and are supplied as Industrial boilers as-well-as Utility boilers

of 60 MW, 110 MW, 210 MW & 500 MW capacity.

OIL RIGS

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BHEL started manufactures oil field equipment in collaboration with M/s UA Steel Engineers

and Consultants USA (National Oil Well), M/s Skytop Brewster USA, M/s Branham

Industries USA, M/s IRI International, USA. After successful absorption of technology,

BHEL now has the capability to manufacture conventional deep drilling rigs up to a depth of

9000 meters, mobile rigs to a depth of 3000 meters and well servicing rigs to a well depth of

6100 meters.

SWITCH GEARS :

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BHEL is involved in the design, commissioning and service of a wide range of

switch gears catering to various applications like power station auxiliaries, power

distribution process industries, rural electrification, open cast mines, electric traction and

other special applications, BHEL started manufacturing circuit breakers in 1965 in

collaboration with ASIA, Sweden and to keep pace with the technological advancement

and to meet customer requirements.

Switchgear is of following types:

Minimum of circuit backers (33KV-220KV)

Sf6 circuit breaker (132KV-400KV)

Vacuum circuit breakers (3.3KV-33KV)

SOLAR WATER HEATING SYSTEM:

BHEL a pioneer in the field of design manufacturing and installation of solar water

heating systems in the country till date installed systems covering more than 74000m2 of

absorber area of capacity over 37lakh liters per day. The largest Solar water heating system is

used at Dr. Will Mar Schwable India Pvt.ltd., Noida.

In the BHEL make solar collector, stabilize efficiency values up to 65% is assured

under normal circumstances over a long period without degradation

COMPANY'S VISION, MISSION AND OBJECTIVES:

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VISION: A world class, innovative, competitive and profitable engineering enterprise

providing total business solutions.

MISSION: To be the leading enterprise providing quality products systems and

services in the field of energy, transportation, industry, Infrastructure and

other potential areas.

VALUES:

* Meeting commitments made to external & internal customers

*Foster learning, creativity & speed of response.

*Respect for dignity & potential of Individuals.

*Loyalty and pride in the company.

* Team playing.

*Zeal to excel.

*Integrity and fairness in all matters.

OBJECTIVES:

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GROWTH:

To ensure a steady growth by enhancing the competitive edge of BHEL in existing business,

new areas and international operation so as to fulfill national expectations from BHEL

PROFITABILITY:

To provide a reasonable and adequate return on capital employees, primarily through

Improvements in operational efficiency, capacity utilization and productivity and generate

adequate internal resources to finance the company's growth.

Confidence by providing increased value for this money through international standards of

product quality, performance and superior customer service.

TECHNOLOGY:

To achieve technology excellence in operations by development of indigenous technologies

to and efficient absorption and adaptation of imported technologies to suit business needs

and priorities and provide a competitive advantage of the company

IMAGE:

To fulfill the expectations which stockholders like government as owners, employees,

customers and the country at large have from BHEL.

SWOT ANALYSIS:

The strengths, weakness, opportunities and threats, which are experienced

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By BHEL as a growing concern, have been summed up in the following lines:

STRENGTHS:

*Excellent state of art facilities.

*Good working condition.

*Rapport between management and Union.

*Products manufactured to International quality.

*Low labour cost and low manufacturing cost.

*Vast pool of trained man power.

WEAKNESSES:

*System implementation inadequate.

*No financial Package.

*Inadequate compensation payable to employees.

*Excess manpower.

OPPORTUNITIES:

*Growing power sector machinery.

*Liberalization has opened up the market.

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*Navaratna company status.

*Dominant player in domestic market.

*Export potential growing.

THREATS:

*Liberalization -Entry of MNC'S/ private sector-more Compensation.

*MNC'S weaning away good employees with good attractive salaries.

*Govt. Taxation policy-against manufacturing sectors.

*Poor infrastructure.

*Dumping of goods.

*Attractive credit policy by FFI'S and MNC'S.

KEY FACTORS:

*45-CNC M/C tools including CNC 5-axis M/C Center.

*50 ton balancing tunnel

*Computerized attendance system

*Series-39 main frame computers-with multiprocessor system

*Capacity-200 remote terminals with 13 bulk printers

*CAD/CAM,PC-LAN{Local area network}

*More than 200 personal computers with data exchange facilities with mainframe

computer

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WELFARE:

*Six schools,2junior Colleges and 1 womesn's degree college

*School for mentally retarded.

*Houses on ownership basis to employees-LIG-1000,MIG-2500 and HIG-460

*Adopted 3 villages provided basic amenities.

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COMPANY PROFILE

ABOUT B.H.E.L RAMACHANDRAPURAM UNIT:

About 30km away from the city centre on the fringes of the historical city of the

qutub shah kings lies the hub of the Ramachandrapuram unit of Bharat heavy electrical

limited, Hyderabad made a beginning in 1965 with the idea of "Bringing power to the

people".

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The success story of B.H.E.L, Ramachandrapuram has its roots in its Commitments

to the nation's economic growth, towards which it has set high standard for itself. Striving

hard to take part in the building of a Strong and self reliant India.

B.H.E.L started its operations, initially by manufacturing 12MW,60MW and

110MW capacity steam turbines, generators and auxiliaries for the power and the industry

sector with collaboration of SKODA of CZECHOSLOVAKIA.

Realizing the need for diversification, B.H.E.L Hyderabad soon ventured in To

other areas absorbing latest technologies from world leaders to meet Emerging challenges

and the needs of the country. Steam turbines , Gas Turbines Turbo generators Compressors,

Pumps, Switch Gears, Oil Field Equipment, pulverizing mills, Heat exchangers including a

host of auxiliaries, on now form the profile of products at B.H.E.L, Hyderabad..

INTERNATIONAL OPERATIONS:

BHEL has exported its equipment and services to over 50 countries. In Malaysia,

BHEL has supplied 80% of the Boilers besides several hydro sets and gas turbines. BHEL

equipments are in operation in Malta, Cyprus, Saudi Arabia, Oman, Egypt, Cyprus, Libya,

Greece, Bangladesh, Srilanka, Iraq, and Australia, etc. BHEL exports turnkey power projects

of thermal, hydro, abd gas based types , substation projects, rehabilitation projects, besides a

wide variety of products like insulators, transformers, valves motors, traction generators and

services for renovation and modernization and operation power station.

RESEARCH AND DEVELOPMENT [R&D]:

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BHEL is one the few companies worldwide involved in development of Integrated

Gasification Combined Cycle[IGCC] technology, which would usher in clean coal

technology. BHEL R&D efforts have produced several new products. Some of the recent

successful R&D products are automated storage retrieval systems, automated guided vehicles

for material transportations, automatic robotic welding systems.

HUMAN RESOURCES DEVELOPMENT (HRD)

The greatest strength of BHEL is its highly skilled and committed people. Every

employee is given equal opportunity to develop himself and improve his position.

Continuous training and retaining, a positive work culture and participative style of

management have led to the development of a motivated work force and enhanced

productivity and quality.

ORGANISATION STRUCTURE

B.H.E.L a public sector undertaking is a company form of organization with

corporate functions, Business sectors and Operating units under the control of Chairman &

Managing director reporting to the Board of directors.

Directors individually deal with corporate functions with the help of Executives

Directors/ General Manager’s in-charge.

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Each unit is headed by an Executive Director /General Manager’s in-charge.

MANPOWER STRENGTH IN B.H.E.L

The highly trained and motivated manpower of B.H.E.L is its biggest asset.

The total number of regular employees working in B.H.E.L, RC PURAM UNIT is

6358 out of this, Executive’s are 1587, supervision are 1200 and the Non-supervisors are

3471 this work force is an unending reservoir of talent, which alone can transform the

company in to a global player it wants to be.

The vision of B.H.E.L becoming a truly Indian company deeply imbibed in our rich

culture and heritage is neither a dream nor too distant a reality

OBJECTIVES OF B.H.E.L:

To achieve and maintain a leading position as supplier of quality equipment,

Systems and services to serve the National & International Markets in the field of energy.

The areas of interest would be conversion, Transmission and Utilization & Market

leadership.

FINANCE DEPARTMENT IN B.H.E.L HYDERABAD

Additional General manager/Finance heads the finance department at B.H.E.L Hyderabad.

It is segregated into different sub groups reporting to Additional General Manager/ Finance.

Finance department is organized in to Product Wing and Centralized wing.

Product Wing is divided into various products like TCGT, EM, HEF, PUMPS, SG,

PULV, F&S, WORKS & MISC, ED&ST, BUDGET & MONITORING ETC.

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Each product groups deals with all types of finance and Accounting relating to that

product wise concurrence to proposals for Procurement and incurring expenditure, material

accounting, cost accounting sales accounting, budget preparation, and other miscellaneous

activities relating to that product.

Centralized Wing deal with Establishment matters pertaining to all employees of the

unit, Cash management dealing with total cash management of the unit, Books section deal

with preparation of annual accounts and Taxation matters, Export incentive section deal

with all export incentive matters, stock verification and Productivity groups related to those

subjects.

In addition, there is an internal audit, which audits all the functions of the unit and

directly reporting to corporate office.

As it is a product form of organization, Financial Accounting system is desired to

meet the requirement of operation.

The flow of authority and responsibility has definite forms of hierarchy ranging from

Additional General Manager to the Clerical cadre.

BHEL today enjoys national and international presence and it is ranked among the top

12 companies in the world manufacturing power generation equipment.

The first plant of what is today known as BHEL was established nearly 40 years ago in

1956 at Bhopal and was the genesis of the Heavy electrical equipment industry in India.

A country –wide network of 14 BHEL manufacturing units is spread across Bangalore,

Bhopal, Hardwar, Tiruchirapalli, Hyderabad, Ran pet, jagishpur, Reaper, goindwal,

Jhansi, Chennai, Varanasi and Gurgoan in addition to a number of service division all

over the country.

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B.H.E.L’s wide range of Products Caters to the need of Power generation for

Thermal, Hydro and Nuclear power station, Transmission, Transportation, Industry, Oil

and Gas and Non Conventional energy.

B.H.E.L’s collaboration with world leader’s help in keeping it abreast of the Latest

technologies in the field, BHEL is well known for reaching power to the people.

But the cornerstone of its philosophy is anchored on its endeavor to offer quality

products through dedicated service.

The BHEL has emerged as an industrial empire that has carved a niche as a major

power generating equipment manufacturer in India.

The operation of BHEL is organized around business sectors to provide a strong Market

orientation.

These business sectors are power, Industry and International operations.

The company has been chosen as one of the “NAVARATNA” public sector Enterprise,

which is to be supported by the government in their endeavor.

To become future global players, a strong work force of 53,000 dedicated

personnel provides this assurance in ample measure.

TOTAL EMPLOYEES TOTAL EMPLOYEES

TOTAL ASSETS 29352 MILLION

REVENUE 18.6% Rs 4430 MILLION

TURNOVER 5000 CRORE

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PROFIT 35000 CRORE


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