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A Project Report on Financial Statement Analysis

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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)

DVR PG INSTITUTE OF MANAGEMENTKASHIPUR VILLAGE, SANGAREDDY MANDAL, MEDAK Dist - 502 285

ANDHRA PRADESH, INDIA. 2010-2012

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)

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 20102012 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 hasnt been submitted to any other university for the award of any degree or diploma.

P.MAHESH (1409-10-672-050) PLACE: DATE:

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

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.

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.

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 firms 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 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

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 20092010 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 study1. 2.

The study is confined to a period of last 4 years. As most of the data is from the secondary sources, hence the accuracy is limited.

COMPANY PROFILE

BHARAT HEAVY ELECTRICALS LIMITED

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 BHELS 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

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:

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

The strength, weakness, opportunities and threats which are being experienced by BHEL as a growing concern have been summarized up in the following lines.

STRENGTHS 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 1. Growing power sector machinery

2. Liberalization has opened up the market 3. Navratna company status 4. Dominant player in domestic market. THREATS 1. Liberalizationentry of MNCS or private sector-more competition. 2. MNCS taking away good employees with attractive packages. 3. Government taxation policy-against manufacturing sector. 4. Poor infrastructure.

PRODUCTS OF BHEL 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.

THEORITICAL FRAMEWORK FINANCIAL ANALYSIS OF STATEMENT

INTRODUCTION TO FINANCE: 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: 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: 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. 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 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. It is meant that with in the limits of accepted accounting principles and the very and tabulation of the BHEL or the financial data for this purpose performance data of

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 strengths 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.

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 dont 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:

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 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 strengths and weaknesses of a business concerns by regrouping and analysis of figure contained in financial statements by making comparisons 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. AND INTERPRETATION OF FINANCIAL

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, its 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

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

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.

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.

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

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

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.

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 shortterm 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

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.

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 enterprises ability to pay the interest regularly and to repay the principal on maturity or in predetermined 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.

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 holders 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

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)/(1Rate 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 RATIOS: 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.

Net Sales=Total Sales- Sales Returns Cost of Goods Sold=Opening Stock + Purchases + Manufacturing expensesclosing 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

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.

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.

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.

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 firms 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.

DATA ANALYSIS AND INTERPRETATION

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

800000 700000 600000 500000 400000 300000 200000 100000 0 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 201002 03 04 05 06 07 08 09 10 11 Current as s et liabilities ratio Current A s s et Current as s et liabilities ratio Current Liability Current A s s et 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.

Acid Test Ratio Year Liquid assets Liquid liabilities Ratio 2001-02 898 73129 2002-03 1281 74427 2003-04 472 84990

0.012 0.017 0.005

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

2094 4643 12 14 15 1475 1415

116644 143200 208869 243220 376332 397574 502024

0.018 0.032 0.00005 0.00003 0.00003986 0.00371 0.002818

600000 500000 400000 300000 200000 100000 0 Liquid Assets Liquid Liabilities Ratios

2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 201002 03 04 05 06 07 08 09 10 11

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.

Net working capital Net working year 2001-02 2002-03 capital Capital employed Ratios 82663 90522 0.9131 92242 99337 0.93

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

70662 76053 91862 67193 96410 77265 183230 269495

79114 85026 102462 79459 107986 96894 207051 305907

0.8931 0.894 0.89 0.84 0.89 0.797 0.884 0.881

350000 300000 250000 200000 150000 100000 50000 0 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 201002 03 04 05 06 07 08 09 10 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

Debt equity ratio year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Total debt 497 573 386 513 1053 607 587 2566

Equity 3252 3252 3252 3252 3252 3252 3252 3252

Ratios 0.15 0.17 0.11 0.15 0.32 0.18 0.18 0.789

2009-10 2010-11

2034 2265

3252 3252

0.62 0.70

3500 3000 2500 2000 1500 1000 500 0 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

Fixed assets ratio Capital year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Fixed Assets employed Ratios 7859 90522 0.07 7095 99337 0.08 8360 79114 0.07 8896 85026 0.1 10600 102462 0.1 12347 79459 0.15 9909 107986 0.09 17699 96894 0.18 22595 207051 0.11 31830 305907 0.10

350000 300000 250000 200000 150000 100000 50000 0 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 201002 03 04 05 06 07 08 09 10 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

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

PBIT 13500 13420 15821 33122 60867 63290 68916 68478 86438 130330

Interest 3054 258 48 1105 682 2300 5870 6826 7101 8583

Ratios 4.42 52.01 329.6 29.97 89.24 27.51 11.74 10.03 12.17 15.18

140000 120000 100000 80000 60000 40000 20000 0 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 201002 03 04 05 06 07 08 09 10 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

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

Gross profit Net sales Ratios 13500 153205 0.088 13420 137838 0.097 15821 174490 0.07 33122 174668 0.189 60867 267217 0.227 63290 289241 0.218 68916 310235 0.2224 68478 414816 0.165 86483 500342 0.172 130330 665323 0.196

700000 600000 500000 400000 300000 200000 100000 0 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 201002 03 04 05 06 07 08 09 10 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. Operating ratio year 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 131006 153205 0.85 116708 137838 0.84 149823 174490 0.85 136630 174668 0.78 201962 267217 0.75 221227 289491 0.76 234677 310235 0.76 338382 414816 0.81 404647 500342 0.8 524531 665323 0.79

700000 600000 500000 400000 300000 200000 100000 0 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.

Return on capital employed Capital year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 PBIT 13500 13420 15821 33122 60867 63290 68916 68478 86438 130330 employed Ratios 90522 0.149 99337 0.135 79114 0.199 85026 0.389 102462 0.594 79459 0.796 107986 0.638 96894 0.706 207051 0.417 305907 0.426

350000 300000 250000 200000 150000 100000 50000 0 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 201002 03 04 05 06 07 08 09 10 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.

Debtors turnover ratio Average year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Net credit sales debtors Ratios 153205 85001 1.8 137838 81237 1.69 174490 82829 2.1 174668 112238 1.55 267217 135322 1.97 289491 177301 1.63 310235 215291 1.44 414816 287414 1.44 500342 328201 1.53 665323 537364 1.24

700000 600000 500000 400000 300000 200000 100000 0 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 201002 03 04 05 06 07 08 09 10 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.

Creditors turnover ratio Net credit year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average purchases creditors Ratios 12060 29738 0.4 16646 27610 0.6 16350 20467 0.79 16727 24225 0.81 19656 39495 0.49 21772 46452 0.48 25459 54586 0.4664 31900 58078 0.54926 60293 88228 0.68 65700 103305 0.64

120000 100000 80000 60000 40000 20000 0 Net credit purchases Average creditors Ratio

2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 201002 03 04 05 06 07 08 09 10 11

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.

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

Net sales Fixed assets Ratios 153205 7859 19.49 137838 7095 19.42 174490 8360 20.87 174668 8896 19.63 267217 10600 25.2 289491 12247 23.63 310235 9909 31.3 414816 17699 23.43 500342 22595 22.14 665323 31830 20.90

700000 600000 500000 400000 300000 200000 100000 0 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.

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

Total debt 497 573 386 513 1054 607 587 2566 2034 2265

Equity 3252 3252 3252 3252 3252 3252 3252 3252 3252 3252

Ratios 0.15 0.17 0.11 0.15 0.32 0.18 0.18 0.78 0.62 0.70

3500 3000 2500 2000 1500 1000 500 0 200102 200203 200304 200405 200506 2006- 200707 08 200809 200910 201011 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

Comparative income statement 2009-2010 and 2010-11 DESCRIPTION 2009-10 TURNOVER- BHEL - NON-BHEL TOTAL TURNOVER CHANGES IN WIP CHANGES IN FG EXPORT INCENTIVES GROSS TURNOVER EXCISE DUTY GTO LESS ED DIRECT MATERIALS SUB-CONTRACT PAYMENT POWER AND FUEL TRANSFER IN 1106 499236 500342 49447 -9622 690 540857 16859 523998 340315 1356 1746 806 2010-11 increase/decrease increase/decrease 400 664923 665323 -25439 669 640553 33288 607265 342167 1682 -706 165687 164981 -74886 -9622 -422 99696 16429 83267 1852 -63.83% 33.19% 32.97% -151.45% -21.00% 18.43% 97.44% 15.89% 0.544% 24.04% -3.04% -15.51%

378 1693 -53 681 -125

SERVICE TOTAL OF `C' VALUE ADDED PERSONNEL PAYMENTS INDIRECT MATERIALS OTHER EXPENSES -BHEL OTHER EXPENSES NON BHEL PROVISIONS PROV.EXCH.VAR. LESS:MISC.INCOME TOTAL OF `E' GROSS MARGIN (PBIDT) DEPRECIATION DRE ON VRS GROSS PROFIT (PBIT) INTEREST PROFIT BEFORE TAX GTO LESS ED OPERATING COST

344223 179775 62236 3902 7101 26301 -226 894 11522 88686 91089 4606 86483 -7101 93584 523998 404647

346223 2000 261042 81267 69941 7795 5861 2059 8583 27410 1482 1109

0.58% 42.20% 12.38% 52.76% 20.87% 4.22% % % 102.71% 41.49% 48.82% 13.57% 50.70% -140.91% 42.37% 15.90%

38565 -1523 23356 11834 125481 36795 135561 5231 130330 -2905 133235 607265 524531 44472 625 0 43847 -10006 39651 83267 0 119884

Comparative income statement 2008-09 & 2009-10

DESCRIPTION 200809 TURNOVER- BHEL - NON-BHEL TOTAL TURNOVER CHANGES IN WIP CHANGES IN FG EXPORT INCENTIVES GROSS TURNOVER EXCISE DUTY GTO LESS ED DIRECT MATERIALS SUB-CONTRACT PAYMENT POWER AND FUEL TRANSFER IN SERVICE TOTAL OF `C' VALUE ADDED PERSONNEL PAYMENTS INDIRECT MATERIALS OTHER EXPENSES -BHEL OTHER EXPENSES - NON BHEL PROVISIONS PROV.EXCH.VAR. LESS:MISC.INCOME TOTAL OF `E' GROSS MARGIN (PBIDT) DEPRECIATION DRE ON VRS GROSS PROFIT (PBIT) INTEREST PROFIT BEFORE TAX GTO LESS ED 779 41403 7 41481 6 10637 4938 1112 43150 3 24537 40696 6 25959 2 978 1925 1347 26384 2 14312 4 58365 4560 6436 15402 142 -324 13913 70668 72456 3978 68478 -6826 75304 40696 6 33838 200910 Increase/Decrease Increase/Decrease% 1106 327 49923 6 85199 50034 2 85526 49447 38810 -9622 690 -422 54085 7 109354 16859 -7678 52399 8 117032 34031 5 86723 378 1746 -169 806 -541 34422 3 80381 17977 5 62236 3902 7101 26301 -226 894 11522 88686 91089 4606 36651 3871 -658 665 10899 1356 41.98% 20.58% 20.62% 364.86% % -37.95% 25.34% -31.29% 28.76% 33.41% 38.65% -8.78% -40.16% 30.46% 25.61% 6.63% -14.43% 10.33% 70.76% -17.18% 25.50% 25.72% 15.79% 26.29% 24.27% 28.76%

-2391 18018 18633 628 0 86483 18005 -7101 93584 18280 52399 8 117032 0 40464

Comparative income statement 2007-2008 and 2008-09 comparative income statement DESCRIPTION 200708 TURNOVER- BHEL - NON-BHEL TOTAL TURNOVER CHANGES IN WIP CHANGES IN FG EXPORT INCENTIVES GROSS TURNOVER EXCISE DUTY GTO LESS ED 667 30956 8 31023 5 17781 4591 2283 33489 0 27236 30765 2008-09 Increase / Decrease Increase / decrease % 16.79% 33.74% 33.71% -39.97% 7.56% -51.29% 28.85% -9.91% 32.28%

779 112 414037 414816 104469

104581 10637 -7108 4938 347 1112 -1171

431503

96613 24537 -2699 406966 99312

DIRECT MATERIALS SUB-CONTRACT PAYMENT POWER AND FUEL TRANSFER IN SERVICE TOTAL OF `C' VALUE ADDED PERSONNEL PAYMENTS INDIRECT MATERIALS OTHER EXPENSES -BHEL OTHER EXPENSES - NON BHEL PROVISIONS PROV.EXCH.VAR. LESS:MISC.INCOME TOTAL OF `E' GROSS MARGIN (PBIDT) DEPRECIATION DRE ON VRS GROSS PROFIT (PBIT) INTEREST PROFIT BEFORE TAX GTO LESS ED

4 18384 5 790 1840 1394 18786 9 11978 5 36001 4039 6125 12848 1805 -1524 11746 47548 72237 3321 68916 -5870 74786 30765 4 23467 7

259592 978

75747

41.20% 23.80% 4.62% -11.93% 40.44% 19.48% 62.12% 12.90% 5.08% 19.88% -92.13% % 18.96% 48.63% 0.303% 19.78% -0.64% % 0.69% 32.28%

188 1925 85 1347 -47 263842 143124 75973

23339 58365 22364 4560 521 6436 311 2554 142 -1663 -324 13913 2227 70668 23120 72456 219 3978 657 0 68478 -438 -6826 75304 518 99312 0 103705

15402

406966

OPERATING COST

338382

44.19%

FINDINGS1.

The net working capital was Rs 91021 lacs in 2000-2001. This decreased to Rs 82663 lacs in the year 2001-2002. In the year 2006-2007 the net working capital is Rs 67193 lacs.

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:1. The current ratio of BHEL is decreasing year by year . In the year 20002001 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 years 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:

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.

INTRODUCTION

INTRODUCTIONThe 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 asthe firms 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 firms operations beyond the one year period. The firms investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets.

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. 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 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 Sources1.

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 companys website. 3. Books and journals pertaining to the top.

REVIEW OF LITERATURE

CAPITAL BUDGETING

MEANING OF A BUDGET: 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 predetermined 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. 2. Financial budgets. 3. Master budgets. (C) CLASSIFICATION ON THE BASIS OF FLEXIBILITY 1. Fixed budget. 2. Flexible budget.

(A) Classification according to time1. 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 functions1. 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 3. Master Budget. In this type of budget various functional budgets are integrated into master budget.

(C) Classification on the basis of flexibility1. 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 budgets1. Sales budget 2. Production budget 3. Cost of production budget 4. Materials budget 5. Direct labor budget 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 managements desire to enhance or depress reported profits. 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. 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:-

(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 assetsacquisition 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 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-todate 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 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 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 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. 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.

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 firms 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 firms operations beyond the one year period. The firms investment decisions would 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 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 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 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. (b) It may be useful n considering methods of coast reduction. A reduction campaign may necessitate the consideration of purchasing most up-todate and modern equipment. (c)

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