INTRODUCTION

Finance: Finance is defined as the provision of money where it is required. Finance refers to the management of flows of money through an organization it concerns with the applications of skills in the manipulation, use and control of money. Every enterprise whether big, medium it need finance to carry on its operations and to achieve its targets. Finance is so indispensable today that it is rightly said to be life hood of an enterprise. The subject finance has been traditionally classified into two classes 1. Public finance: - it deals with the requirements, receipts and disbursements of funds in the government institutions like state local self governments and central government. 2. Private finance: - it concerned with the requirements and disbursement of funds in case of an individual, a profit seeking business organization and non profit organization. Approaches of finance 1. The finance approach views finance as to providing of funds needed by a business on most suitable terms this approach confirms finance to the raising of funds and to the study of financial institutions from where funds can be procured. 2. The second approach relates finance to cash. 3. The third approach views finance is being concerned with raising of funds and their effective utilization. Definition of F. M. Financial management refers to that part of the management activity which is concerned with the planning and controlling of firms financial resources. It deals with finding out various sources for raising funds for the firm. The sources must be suitable and economical for the needs of the business and the most appropriate use of such funds also forms a pat of financial management.
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Objectives of Financial Management Financial management is concerned with procurement and use of funds. Its main aim is to use business funds in such a way that the firm's earnings are maximized. There are various alternatives available for using business funds. The pros and cons of various decisions have to look in to before making a final selection. F.M provides a frame work for selecting proper cause of action and deciding a viable commercial strategy. The main objective of a business is to maximize the owner economic welfare. These objectives can be achieved by 1. Profit maximization Fixed assets Fixed assets are those assets which are required and held permanently for a pretty long tine in the business and are used for the purpose of earning profits. The successful continuance of the business depends upon the maintenance of such assets, they are not meant for resale in the ordinary long as they are in work order, so they are also known as capital assets. Land and buildings, plant & machinery, motor vans, furniture and fixtures are some examples of these assets. Financial transactions are recorded in the books keeping in view the going concern aspect of the business unit. It is assumed that the business unit has a reasonable expectation of continuing business at a profit for an indefinite period of time. It will continue to operate in the future. This assumption provides much or the justification for recording fixed assets at original cost and depreciating them in a systematic manner without reference to their current realizable value. It is useless to show fixed assets in the balance sheet at their estimated realizable values if there is no immediate expectation of selling them. The market value of a fixed asset may change with the passage of time, but for accounting purpose it continues to be shown in the books at its bulk value I. e, the cost at which it was purchased minus depreciation provided up-to-date 2. Wealth maximization

Management of fixed assets The selection of various fixed assets require creating the desired production, facilities and decision as regards determination o the level of the fixed assets is primarily the task at their production/technical people. The decision relating to fixed assets involve huge funds for a long period of time and are generally of irreversible nature affecting the long term profitability of a concern. An unsound investment decision may prove to be total very existence of the organization thus management of fixed assets is of vital importance to any organization. The process of fixed assets management involves: 1. Selection of most worthy projects or alternatives of fixed assets 2. Arranging the funds/capital for the same First important consideration to be acquire only that amount of fixed assets which will be just sufficient to ensure smooth and efficient running of the business. In some cases it may be economical to buy certain assets in lot size. Second consideration to be kept in mind is possible increase in demand of the firm's product necessarily expansion of its activities. Hence a firm should have that much amount of fixed assets, which could adjust to increase demand. Third aspect of fixes assets management is the firm must ensure buffer stocks of certain essential equipments/ services to ensure uninterrupted production in these events of emergencies. Sometimes, there may be a breakdown in some equipment or services affecting the entire production. It is always better to have some alternative arrangements to deal with such situations but at the same time the cost of carrying such buffer stock should also be evaluated. Efforts should also be made to minimize the level of buffer stock of fixed assets be encouraging their maximum utilization during learn period, transferring a part of peak period and living additional capacity.

Need for valuation of fixed assets Valuation of fixed assets is important in order to have fair measure of profit or loss and financial position of the concern. Fixed assets are meant for use for many years. The value of these assets decreases with their use or with time of for other reasons. A portion of fixed assets reduced by use is converted into cash through charging depreciation. For correct measurement of income, proper measurement of deprecation is essential as depreciation constitutes a part of the total cost of production.

LONG TERM CAPITAL BUDGATING WITH AN EXAMPLE (UNDEREXPANSION CATEGORY.) Stage III-1 X 500 MW was started recently in Ramagundam. This is taken as an example in studying how the investment decision is made. Construction itself took 5-6years. Its benefits are enjoyed for several years. For this purpose, estimating cash outlay for 5-6 year period of construction and estimating cash inflows for 20-30 years is very critical in practice. Into peep in to such critical, this example has been taken up. Introduction: RSTPS was originally conceived for an ultimate capacity of 2100 M W, consisting of 3units of 200MW & 3units of 500 MW each. This capacity has already been commissioned and is under operation Recently one additional unit of 500MW. Capacity was commissioned thus increasing the station capacity to 2600 MW. Project-Highlights: Location: Ramagundam, Karimnagar District, Andhra pradesh. Land requirement: 10,000 Acres of land for three stages and 100Acres for railways. Capacity: Stage I: 3 X 200 MW Stage II: 3 X 500 MW Stage III: 1X 500 MW Fuel: Coal Coal Linkage: Peak coal requirement is 9400 tones per day, based on designed calorific value of 3200 kcal/kg. Linkage is granted by Ministry of Coal from western coalfields, coal is also received from WCL & SCCL. Beneficiary States: States in southern India. Project Financing: Overall Debt-Equity Ratio is 70:30. Debt is means of domestic borrowing carrying an overall Interest Rate of 16.5%.

Project cost: Power plant & facilities cost Rs.1229.38 millions including IDC, WMC/3rd Qtr.'98 price level. (IDC-Interest During Construction). (WCM-Working Capital Margin). Cost of Generation: 259.31 paise /KWH. Environmental aspects: No objection certificate from APSPCB (Andhra Pradesh State Pollution Control Board) & MOEF (Ministry of Environment and Forest). Commissioning Schedule : 56 Months. Demand Analysis and Justification: RSTPS stage III is expected to yield to the southern region during 10 th plan (2002-2007) & beyond. Southern region has experienced peaking shortage of 3226 MW (19.5%), energy shortage of 13,349 MW (17.3%) during 19971998 it is expected to continue during 1998-1999 also. If proper steps are not taken Southern region has to face major demand & supply gap by the end of 10th plan period. In view of above, RSTPS stage III is fully justified in the angle of required augmentation to neutralize the shortages. This RSTPS stage III is of 500 MW. Usually in case of power projects, the feasibility study is conducted in terms of the following: Site selection Location Road Approach Road Distance Railway Airport

Land Availability Water Availability Coal Availability Infrastructure Facilities Permanent Township Ancillary Buildings
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In case of RSTPS stage III also; feasibility study has been conducted on above aspects. Basis of Cost Estimate: l. Preliminary & Civil Works: - Rates of various items of works have been taken from latest awarded rates for NTPC projects duly updated to 3rd Quarter' 98. Estimates for some items are worked out as per the analysis based on latest prevailing Ramagundam. 2. Mechanical, Electrical & Transportation:- It is based on awarded prices/ Bid prices. The following are also charges: Excise Duty @ 10% for small equipments. CST @ 4% on supply cost for domestic component. Customs Duty @ 22% on foreign component 3. Others: Engineering & Administration - 6% of works cost of the project. Trial and pre-commission charges - 0.5 % of works cost. Contingency- 3 % of total works cost Consultancy- 1 % of works cost. Training of O & M staff & losses - Rs.l crore & Rs. 0.5crore on stocks FINANCIAL ANALYSIS: A. Phased Fund Requirement:- Anticipated phasing of requirement of funds for power plant & facilities based on the following: Schedule of design, procurement, fabrication and installation as per project master network. The terms of payment stipulated in the documents of similar equipment executed for other projects. B) Working Capital Margin:- An basis:
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at

amount of Rs.41.50 crores has been provided

which is 2.5% of works costs requirement & same is calculated on the following

1.

Fuel Expenses: Coal Cost Oil Cost 30 day's requirement 30 day's requirement

2. 3.

O Ss M Charges; 30days requirement Fuel stock: Coal Cost Oil Cost 15day's requirement 60day's requirement

4. 5. C)

Spares: 1 year less 1/5th of the initial spares Receivables: 60day's requirement Project Financing:- Project is financed by Debt 8s Equity in 70:30 Ratio. Equity is Rs.638.73 crores. Domestic Borrowings is Rs.149.65 crores. Equity is met out from internal resources.

D) Interest During Construction:- Based on phased fund requirement & considering the project being financed from Equity and loan in the ratio 30; 70 & simultaneous drawl of Equity and loan. Interest during construction for power plant and facilities works out to Rs.489.67 crores based on interest rate @ 16.5% on investment decision. Cost of Energy: - The financial and economic cost of energy RSTPS stage III have been worked out based on 16% ROE Capital 8s 15% average rate of interest on loan capital, an average depreciation of 7.73 % per annum, 16.25 % interest on working capital and annual operation of 6000 Hours.

Objectives of the Study 1.To analyze the conventional budgetary system in practice in NTPC. 2. To evaluate and modify to the current budgetary system with reference to the various types of budgets. 3.To evaluate the efficiency and the budgetary control system in NTPC. 4. To offer appropriate suggestions and recommendations for improving the system. 5. To prepare projected financial statements for NTPC from the data taken from various budgets. Scope of the Study The budgetary control systems in RSTPS considers generation and transmission line projects as independent cost centers. This system prepares the Operations & Management budget for each of the cost centers as per the requirements of the costing system. The budget for the investment center is the sum totals of the budgets of the cost centers. Separate budgets are prepared for revenue activities other than operations and research and development, consultancy contracts. To facilitate management, budgets are phased into monthly or quarterly targets. The actual performance is analyzed against this budgeted performance in order to take corrective remedial actions if variances any exist. The projection of internal resources over a period of 5 to 15 years and updating 5 years plans of the Company is also done.

Research Methodology The Research methodology deals with how the study was carried out. This consists of several stages wherein the process proceeds through various stages to finally attain the objective of the study. Hence, for any project the objective or aim of the project is to be known. The objective of the project is set. The organization in which the project is to be carried out is to be selected. The profile or the organization is collected from various journals, monthly magazines, from the employees etc., The introduction to the topic under study has to be given. This can be obtained from various related books, Company library. As the topic under study is on budgets, budgeting and budgetary control, theoretical information is gathered from the above mentioned sources. The budgets i.e., types of budgets and budgetary system that is carried out in NTPC Ramagundam is carefully studied and analyzed with the suggestions and information given by the internal guide allotted by the company. Various budgets from past 2 to 3 years are taken from the concerned official of the Finance Department. The information related to the study was obtained from concerned Officers of RSTPS, NTPC Journals, accounting books, records, RSTPS Library. Once the required information is gathered , the analysis of those budgets is made. This is a comparative study between various budgets of consecutive years. This comparative study leads to draw various conclusions.

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ORGANIZATION PROFILE
INTRODUCTION TO NTPC At the dawn of the New Millennium National Thermal Power Corporation Ltd., the "Navaratna" power giant has emerged as a clear winner. Established on the 7th November, 1975 NTPC is a testimony to the India's mission for power NTPC has been rated as the world's sixth largest thermal power generating company in terms of generation & most Efficient among top ten generators, with over 21,00 MW commissioned capacity and a transmission network over 16,000 circuit kilometers. Feeding the regional grids building up the skills of a 24,000 strong workforce upgrading the technology of its plant and working on new generating capacities. Corporate Vision: To be one of the world's largest and best power utilities, powering India's growth Corporate Mission: Corporate mission of NTPC is to make available , reliable and quality power in increasingly large quantities at appropriate tariffs and ensures timely realization of revenues. Speedily plan and implement power projects, with contemporary technologies. Continuously develop competent human resources to match world standards. Be a responsible corporate citizen with thrust on environment ash utilization. Corporate Objectives : The main Objectives of the Company are as follows: o To add generating capacity with in prescribed time and cost.

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o To operate and maintain power stations at high availability ensuring minimum cost of generation. o To develop appropriate commercial policy heading to remunerative tariffs tend minimum receivables. o To introduce assimilate and attain self-sufficiency in technology, o Acquire expertise in utility management practices and do disseminate knowledge essentially as a contribution to other constituents of the power sector in the country. o To develop research and development ( R&D) for achieving improved plant reliability and to expand the consultancy operations and to participate in ventures abroad. CORPORATE CORE VALUES : o Customer Focus o Organization Pride o Mutual Respect and Trust o Initiative and Speed o Total quality FUTURE PLANS OF NTPC : Anticipated capacity by 2012 of total NTPC is 34,265 MW. New Projects coming up by 2012 : New Projects Green Fields (Coal Based) Expansion (Coal Based) Green Field (CC PP) Expansion (CC PP) MW 5000 3500 1450 1700

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DG Sets (HFO/LWSR) TOTAL -----------------

500 12150

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HONOURS OF EXCELLENCE : The awards won are ...... o o The Prime Ministers Shram Bhushan Awards - 1987, 1989, 1994, 1995, Meritorious productivity awards - 1985, 1986, 1987, 1990, 1991, 1995-96. 1992-93, 1994-95, 1995-96, 1996-97. o CEA Gold Medal - 1997-98 o Qualified for Gold Medal - 1998-99, 1999-2000. o o Safety Award from British Safety Council - 1996, "Sword of Honour" Award from all India Organizations of Employers for Best from British Safety Council - 1987. National Safety Award - 1987, 199-91. Industrial Relations - 1994-95. o Karmika Ratna Award of Andhra Pradesh Government - 19931997. o 1992. o Best Industrial Canteen Award from Government of Andhra Pradesh for the year 1993-04 and 1994-95. o Raj Bhusha Award 1999-2000. o o o Environment Award Power Utilities - 1999. IOC Award for Oil Conservation - 1993. Nine Employees of NTPC received the Shram Bhushan and Shram Andhra Pradesh Government Award for Best Family Planning Drive -

Shri Award for the year 2001. o Climate Protection Award 2002, to CENPEP of NTPC (Centre for Power Efficiency and Environmental Protection). o o Golden Peacock Award for Excellence in Corporate Governance. Best HR Practices Award 2002. o World Climate Technology Award 2002 to CENPEEP of NTPC.

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HISTORY OF RAMAGUNDAM SUPER THERMAL POWER STATION AT DIFFERENT STAGES OF ITS DEVELOPMENT Ramagundam, the saga of Super Thermal Power Station was built along the southern banks of the river Godavari in Karimnagar Dist., of Andhra Pradesh. The sprawling 10,000 acres site is an indicator of the commitment and dedication of National Power Corporation for achieving a vowed objective of "POWER IN PLENTY", launched upon by the Corporation more than a decade ago. A unit of NTPC LTD., setup in 1975 with an outlay of Rs.1750 crores, a pivotal power utility in Central Pubic Sector. The gigantic 2100 MW Super Thermal Power Station now stands as testimony to that, objective fulfilled, largest self-sustaining power station in South India. Ramagundam today is a power station radiant with the spirit of self-reliance, looking boldly to the future for challenges to spur it on. When the nation's prosperity depends on the availability of more power, Ramagundam power station is all set to eater to the rising national demand better & faster.

FINANCIAL RESULTS : 2010-11 Gross Revenue Gross Profit Less : Interest Depreciation Provisions (Net) Prior Period Adjustments (Net) Extra ordinary Items - Capital Receipts Provisions for taxation (including deffered tax of Rs.l Million) Net Profit after Tax
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2011-2012 184878 61211 8677 13784 1729 1 501 2125 35396

194511 65117 9916 15291 1567 803 -1465 36075

Appropriation : Transfer to Bonds Redemption Proposed Dividend Tax on Dividend Transfer to General Reserve Transfer to capital Reserve 1815 7080 395 27500 100 373 7079 0 30000 506

Net profit after tax has increased by Rs.670 Million over the previous year. THE YEAR AT A GLANCE UNITS Generation Sale of Energy Profit before Tax Dividend Dividend Tax Retained earnings Net fixed assets Net worth Loans Funds Capital Employed Value added Ratio's : Debt to equity Return on capital employed No. of employees Valued added per employee Face values for share Earning per share Dividend per share Book value per share Rs.Million % NOS Rs.Million Rs.Million Rs.Million Rs.Million Rs.Million 0.42 10.88 23527 4.11 10.00 4.62 0.91 40.32 0.40 1.93 23972 3.80 1000 453.07 90.61 3666.58 Million Units Rs.Million Rs.Million Rs.Million Rs.Million Rs.Million Rs.Million Rs.Million Rs.Million Rs.Million Rs.Million 2011 138276 190206 37540 7080 395 28600 198650 315040 312157 386343 88084 8317 176787 286453 115812 356526 80889 2012 133178 177868 37521 7079

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RSTPS - AT A GLANCE : Installed Capacity Unit Sizes - 2100 MW - 3 X 200 MW - 3 X 500 MW - 1 X 500 MW Units commissioned - Unit - I - Oct 83 - Unit - II - May 84 - Unit - III - Dec 84 - Unit - IV - June 88 - Unit - V - March 89 - Unit - VI - Oct 89 - Unit - VII Commissioned Transmission System - 2400 Circuits Kms - 400 KV. Source of Coal - South Godavari Coal Fileds of Singareni Collieries. Water Sources - Pochampad Dam Beneficiary States - A.P., Tamilnadu, Karnataka, Kerala, Goa & Pondicherry. Approved Investment Coal Consumption Consumptive Water Coal Transportation - Rs.1702.18 Crores - 8.6 million tones per Annum - 250 Cusees - Merry-Go-Round System of 2.4 Km. Total Land - 10,000 acres

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RAMAGUNDAM SUPER THERMAL POWER STATION PROFILE : According to the mythological legend lord Rama visited Ramagundam during the exile period. His holy feet are enshrined in a monument, which has been preserved over the centuries. RSTPS - Mission : Make available reliable and quality power in increasingly large quantities at appropriate tariffs, and ensure timely realization or revenues. Speedily plan and implement power projects, with contemporary technologies. Implement strategies diversification in the areas of R&M, Hydro, LNG and Nonconventional and Eco-friendly fuels and explore new areas like transmission, information technology etc. Promote consultancy and make prudent acquisitions. Continuously develop competent human resources to match world Be a responsible corporate citizen with thrust on environment protection

standards. rehabilitation and ash utilization. RSTPS - Vision : To be one of the worlds largest and the best power utilities, powering India's growth.

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NTPC RAMAGUNDAM - POLICY: NTPC Ramagundam shall achieve performance excellence the best every time, to the satisfaction of over state holders. We are committed to over vision mission care values safety and statutory as well as corporate requirements. Together we shall project environment prevent pollution and continually improve in areas of a. Fuel conservation b. Ash utilization c. Waste Minisation d. Effluents recirculation e. Afforesation and f. Environmental awareness In this endeavor we get to continually improve over team work knowledge skills and competencies. THE ONSET OF RSTPS : NTPC Ramagundarn was the third in the series of super thermal power stations set up by the Corporation. The foundation stone for this station was laid on 14 Nov. 1978 by late Shri Morarji Desai, then Prime Minster of India. The Station is situated on the bank of river Godavari in Karimnagar District of Andhra Pradesh across the Coal pithead of Singareni Collieries Company Limited. The station has an installed capacity of 2100 MW is the backbone of the Southern Grid.

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Within a decade the station constructed and commissioned 3 units of 200 MW each and 3 units of 500 MW each capacity units. NTPC Ramagundam has the rate distinction of being the only Station in the country to commission all the 6 units ahead of schedule of a feat that will remain a record for a long time. The station has earned the name as the beacon Light of Southern States. The Station has excelled in all facets Operations, namely Generation, Plant Load Factor, Environment Management, Safety Human Resource Development. NTPC / RSTPS Achievements as a great world : Several reputed industries have advocated the need for environment Protection Accomplishing this cause very successfully today is NTPC using Eco friends Measures for Economic growth. Right from the beginning NTPC has made conscious efforts in preserve and upgrade the Environment. A separate Environmental Management group has been set at RSPTS. A rate feat being the successful plantation of casuarinas and eucalyptus trees in and around the ash dykes to prevent ash from being air borne. At RSTPS, the accent is on not only preserving the Environment but also creating a whole new one. This Eco-friendly approach has made the once free less and barren Ramagundam into a sanctuary teeming with plant life.

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RSTPS -HIGHLIGHTS : Honours of Excellence (RSTPS) Received CEA Gold Medal to NTPC Ramagundam on 12th June 2002. This Award is instituted by G07 under Meritorious Productivity Awards scheme, for excellence in power generation. Won Silver Award in Industrial Safety Man Power Status : Executives Non-Executives TOTAL : 520 1285 1805

Performance of RSTPS : Capacity Generation 2100 MW 15,846 MUS

PROBLEMS AND PROSPECTS : The future growth will, however, depend upon resolution of some of the critical problems that are being faced by the company in terms its account receivable position and tariff for sale of NTPC's power these problems are Seriously eroding the financial health in the sector and has performed comparable to international standards. It is indeed unfortunate that payment from the beneficiary SEB's have not been forth coming and the out standings from SEB's continue to mount Central Appropriation

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provided some help. Heavy financial commitments for the debt servicing and fuel bills in addition to the normal operation costs have caused. Considerable financial strain, the monthly sales of energy which are currently around Rs.360 crores are likely to increase considerably in coming months. Poor payments from SEB's are forcing the company to increasingly rely upon expensive short term borrowings towards working capital requirements, thus placing additional burden on its financial resources. Baring these stray events the process of the company over the years has been impressive and the future will see NTPC seeking horizons and crossings one milestones after other. FINANCIAL MANAGEMENT IN NTPC : NTPC has registered a phenomenal growth since its incorporation on Nov. 7, 1979. Its gigantic investment plans to construct STPS involve a tremendous responsibility on the Corporation to husband the resource & enforce it with great degree of purchase & economic judgment so that the goals of corporation are reached at least cost. This calls for high organization finance management. The Finance function can be described as a function concerned with raising resources at least cost, optimizing the use of its resources, maximizing profits & minimizing losses. Associated with this is other function of record keeping of all transactions in accordance with GAAP. The financial function broadly covers the following areas : l. 2. 3. 4. 5. Finance planning involving Acquisition &Administration of funds. Planning & control of expenditure are operations. Payments of bills & wages Accounting accounts to GAAP. Inventory Control
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6. 7.

Internal Audit Management information Statistics Taxes etc.

FIANCIAL PERFORMANCE OF NTPC NTPC recorded a provisional turnover of Rs.119,947 crores during 2002-2003 as against Rs.8,584 crores during 2001-2002. The provisional net profit after tax for 2002-2003 is Rs.3574 crores as compared to Rs.3540 crores last years. 2003. An interim dividend of Rs.400 crores has been paid to the Government for 2002-2003. An interim dividend of Rs.9895 millions has been paid to the Government for 2004-2005. The provisional Return on Capital Employed (ROCE) and Return on Net Worth (RONW) are 10.23% and 11.31% respectively for the year 2002-

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CAPITAL BUDGETING An efficient allocation of capital is the most important finance function in modern times. It involves decisions to commit firm's funds to long-term assets. Such decisions are tend to determine the value of company/ firm by influencing its growth, profitability & risk. Investment decisions are generally known as capital budgeting or capital expenditure decisions. It is clever decisions to invest current in long term assets expecting long-term benefits firm's investment decisions would generally include expansion, acquisition, modernization and replacement of long-term assets. The activities can be listed as follows ; Disinvestments i.e., sale of division or business. Change in methods of sales distribution. Undertaking an advertisement campaign. Research & Development programmes. Launching new projects. Diversification Cost reduction

Features of Investment Decisions : The exchange of current funds for future benefits. The funds are invested in long-term assets. The future benefits will occur to the firm over a series of years.

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Importance of Investment Decisions : They influence the firm's growth in long run. They effect the risk of the firm. They involve commitment of large amount of funds. They are irreversible, or reversible at substantial loss. They are among the most difficult decisions to make. Types of Investment Decisions : Expansion of existing business, Expansion of new business. Replacement & Modernization. Evaluation criteria : Estimation of cash flows. Estimation of the required rate of return. Application of a decision rule for making the choice. Consideration of cash flows is to determine true profitability of the project and it is an unambiguous way of identifying good projects from the pool. Ranking is possible it should recognize the fact that bigger cash flows are preferable to smaller ones & early cash flows are referable to later ones I should help to choose among mutually exclusive projects that which maximizes the shareholders wealth. It should be a criterion which is applicable to any considerable investment project independent of others. There are number of techniques that are in use in practice. The chart of techniques can be outlined as follows :

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CAPITAL BUDGETING TECHNIQUES

Traditional Approach Approach (or) Non-discounted Cash Flows Pay Back Period (PB) Accounting Rate of Return (ARR) Of Return (ARR)

Modern Approach (or) Disconnected Cash Flows Net Present Value (NPv) Internal Rate

Profitability India (PI) Discounted Payable period NPV : It is classic economic method of evaluating the investment proposals. It explicitly recognizes the time value of money. Correct postulation of cash flows arising at different time periods improving that they differ in value are comparable only when their equivalents present values are found out. Steps : 1. Cash flows should be forecasted based on realistic assumptions. 2. Appropriate discount rate (that is firms opportunity cost of capital) should be identified. 3. Present value of cash flows should be calculated using opportunity cost.
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4. NPV is calculated by subtracting present value of cash outflows form present value of cash inflows. Acceptance Rule : Accept if NPV > 0 Reject if NPV < 0 May Accept if NPV = 0 One with higher NPV is selected.

IRR : It takes into account of the magnitude & timing of cash flows. IRR is called so because it depends solely on the outplay & proceeds associated with the investment & not on any rate determined outside the investment. IRR is the discount rate that make NPV = 0. Acceptance Rule : Accept if r > k Reject if r < k May accept if r = k Value additivity principal does not hold when IRR methods is use - IRR of projects do not add. Profitability Index (PI) : It is benefit cost ratio. It is ration of present value of cash inflows at the required rate of return, to the initial cash outflow of the investment. PI = PV of cash inflows
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where r = rate return k = opportunity cost of capital

----------------------Initial Cash outlay Acceptance Rule : Accept if PI > 1 Reject if PI < 1 May accept if PI I PI is a relative measure of projects profitability. Pap Back : It is defined as the number of years required to recover the original cash outlay invested to recover the original cash outlay invested in a project. If project generates constant annual cash inflows, the pay back period is completed as follows. Pay Back = Initial Investment ---------------------Annual cash inflow In case of unequal cash inflows, the payback period can be found out by adding up the cash inflows until the total is equal to initial cash outlay. Acceptance Rule : Accept if calculated value is less than standard fixed by management otherwise reject it. In case of ranking method, accept the lowest rank.

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Discounted Pay Back Period : One of the serious objections to pay back method is that it does not discount the cash flows. Hence discounted pay back period has come into existence. The number of periods taken in recovering the investment outlay on the present value basis is called the discounted pay back period. Discounted pay back rule is better as it does discount the cash flows until the outlay is recovered. ARR : It is also known as return on investment ( ROI). It was accounting information as revelated by financial statements, to measure the profitability of an investment. ARR can be computed as follows: ARR = Average Income ---------------------------Average Investment Average Income = Average of after tax profit. Average Investment = Half of Original Investment. Acceptance Rule : Accept if calculated rate is higher than minimum rate established by the management. Otherwise reject. Incase of raking, highest ARR is given number one rank.

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CAPITAL BUDGETING METHODS IN PRACTICE In a study of the capital budgeting practices of fourteen medium to large size companies in India, it was found tat almost all companies used by back. With pay back and/or other techniques, about 2/3rd of companies used IRR and about 2/5th NPV. IRR s found to be second most popular method. Pay back gained significance because of is simplicity to use & understand, its emphasis on the early recovery of investment & focus on risk. It was found that 1/3rd of companies always insisted on computation of pay back for all projects, 1 /3rd for majority of projects & remaining for some of the projects. Reasons for secondary of DCF techniques in India included difficulty in understanding & using threes techniques, lack of qualified professionals & unwillingness of top management to use DCF techniques. One large manufacturing and marketing organization mentioned that conditions of its business were such that DCF techniques were not needed.

Yet another company stated that replacement projects were very frequent in the company, and it was not considered necessary to use DCF techniques for evaluating such projects. techniques in India included difficulty in understanding & using threes ..,techniques, lack of qualified professionals & unwillingness of top management to use DCF techniques.

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PROCESS CAPITAL BUDGETING PROCESS: At least five phases of capital expenditure planning & control can be identified: Identification (or Organization) of investment opportunities. Development of forecasts of benefits and costs. Evaluation of the net benefits. Authorization for progressing and spending capital expenditure. Control of capital projects. Investment Ideas : Investment opportunities have to be identified or created investment proposals arise at different levels within a firm. Nature of Ida Cost reduction Replacement ( 50% in India cover this level) Expansion Diversification New Product Replacing an old Machine ( or) Improving the Production techniques. Enough investment proposals should be generated to employ the firm's funds fully well & efficiently.
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Level Plant Level

Top management (in India, it is insignificant) Marketing department (or) Plant Manager

Factory Level.

FORECASTING : Cash flow estimates should be development by operating managers with the help of finance executives. Risk associated should be properly handled. Estimation of cash flows requires collection and analysis of all qualitative and quantitative data, both financial and non-financial in nature. MIS provide such data. Correct treatment should be given to : Additional working capital Sale proceeds of existing assets. Depreciation Financial flows (to be distinguished from operation flows) EVALUATION : Group of experts who have no ake to grind should be taken in selecting the methods of evaluation as NPV, IRR, PI, Pay Back, ARR & Discounted Pay Back. Pay Back period is used as "Primary" method & IRR/ NPV as "Secondary" method in India. The following are to be given due importance. For evaluation, minimum rate of return or cut-off is necessary. Usually if is computed by means of weighted Average cost of Capital (WACC) Opportunity cost of capital should be based on risky ness of cash flow of investment proposals. Assessment of risk is an important aspect. Sensitivity Analysis & Conservative for costs are two important methods used in India.

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Pay Back Years 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Total: Pay back Period Initial investment in (Thousand) 40000 60000 70000 20000 10000 66000 25000 12000 90000 30000 423000 = Case in flows in Thousands 8000 1600 2200 4500 4000 3000 2900 1100 1600 1200 30100 Cash out flows in Thousand 12000 15000 12000 16000 16000 18000 11000 22000 80000 70000 272000

Initial Investments Annual Gash Inflows 40000 =) 5Years 8000

Interpretation: a) b) In the pay back method the Investment and the case inflows are fluctuating from Cash inflows are in the order of increasing to decreasing from 2002-03 and 2011-2012 year to year where as in the year 2002-03 it is 40000 and in the year 2011-2012 is 30000

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Profitability Index (P 1) Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Total PI= Investments (In Lakhs) 2945073.37 3030293.17 3192444.28 3461183.11 3545210.87 9015874.00 3991459.40 4028114.20 3667441.15 17338000.00 2079775.00 498896 PV of Cash Inflows Initial Case out lays =) 498896 =) Cash (pv) Inflows 18180 24780 45060 54640 18630 161290 19210 11130 65420 19233 61323 Cash (Initial) Out Flows 20000 30000 60000 80000 30000 22000 33000 70000 40000 80000 60000 525000

0.950278 525000

Interpretation: a) The Profitability index of present Value of cash inflows and cash out flows is fluctuation from year to year in the year 2001-02the present value of cash inflows is 18180 were as in the year 2011-12 has been in creased with 61323 b) The highest cash in flows has been recorded in 2006-07 as 161290 and lowest has been recorded as 18180 in the year 1997-98

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Average rate of Return Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Investments (Lakhs) 400000 480000 280000 240000 150000 260000 6,00000 100000 250000 2760000 = Average Income (Thousands) 20000 15000 28000 85000 75000 64000 78000 25000 18000 408000 Average Income Average Investments =) Interpretation: a) Average rate of return is calculated based on Average income and Average in vestment where as Average income in the year 2002-03 is 20000 and Investments in the year 2002-03 is 400000 b) The Value from 2002-03 and 2011-12 are fluctuating from year to year 20000 =) 0.05% 400000 (Lakhs) Cash Flows (of the taxes) 100000 260000 440000 750000 160000 200000 300000 600000 800000 9010000

Average Rate of Return

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Long Term Capital Budgeting In NTPC

PRE - INVESTMNET STAGE In a planned economy, as in India, the identification of public sector projects needs to be done within the overall framework of national the sectoral planning. All projects of every sector need to be identified scientifically at the time of plan formulation. In actual practice, however, it is observed that `identification' stage is the most neglected stage of the project planning. The five year plans indicate the broad strategy of planning economic growth rate and other basic objectives to be achieved during the plan period. The macro level planning exercise undertaken at the beginning of every five year plan indicates broadly the role of each sector's physical targets to be achieved and financial outlays, which could be made available for the development of the sector during the plan period. The identification of a project in the Five Year Plan is not the sanction of the project for implementation. It provides only the `green signal' for the preparation of feasibility report (FRO for appraisal and investment decision. A preliminary scrutiny of the FR of the project is done in the Ministry and thereafter copies of the feasibility report are submitted to the appraising agencies, viz., Planning Commission, Bureau of Public Enterprises and the Plan Finance Division of the Ministry of Finance. Thus the organizational responsibility for identifying these projects rests with the concerned administrative ministry, in consultation with its public enterprises. The essential steps for project identification and preparation relates to studying (i) imports (ii) substitutes (iii) available and raw material (iv) available technology and skills (v) inter-industry relationship (vi) existing industry (vii) development plans (viii) old projects etc.
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It may be mentioned that in actual practice, these steps are hardly scientifically studied and followed by the administrative ministry public sector undertaking at the time of project identification. The public sector projects many a time come spontaneously on the basis of ideas and possibilities of demand or availability of some raw materials and not an outcome of scientific investigation and systematic search for feasible projects. PROJECT FORMULATION : The second stage of "Project Cycle" viz. Project Formulation, is a pre-investment exercise to determine whether to invest, where to invest, when to invest and how much to invest. The project/ feasibility reports are meant to provide required information for assessing technical, financial, commercial, organization and economic viability of the project planning in India, mainly because of relatively late realization of its importance. As a result, the investment decisions for large projects in the past were taken on half-baked and illconceived projects and time-over runs and cost-over runs of public sector projects have become a regular feature rather than exception. In early seventies along with the setting up of the Public Investment Board (PIB) the Government created a new project Appraisal Division in the Planning Commission. This Division prepared and circulated "Guidelines for preparing Feasibility Reports of Industrial Projects" in 1974. This guidelines, unlike earlier manual, indicates all the information and data required to be presented and analysed in the feasibility report, so as to enable the appraisal agency to carry out (i) technical analysis - to determine whether the specification of technical parameters are realistic, (ii) financial anaylsis - to determine whether the proposal is financially viable, (iii) commercial analysis - to determine soundness of the product specifications, marketing plans and organization structure and (iv) economic analysis, to determine whether a project is worthwhile from the point of view of nation and economy as a whole.

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The guidelines describes in details, the information required to be given and analysed on the following issues : (a) general information of the sector, (b) objective of the proposal, (c) alternative ways, if any of attaining the objectives and better suitability of the proposed project,(d) project description - gestation period, costs, technology proposed, anticipated life of the project etc., (e) demand analysis, total demand / requirements of the country, including anticipated imports and exports and share of the proposed project, (fl capital costs and norms assumed, activity wise and year wise, (g) operating costs and norms, (h) revenue and benefits estimation etc. PROJECT APPRAISAL : The appraisal of the project follows the formulation stage. The objective of the appraisal process is not only to decide whether to accept or reject the investment proposal, but also to recommend the ways in which the project can be redesigned or reformulated so as to ensure better technical, financial, commercial and economic viabilities. The project appraised which is an essential tool for judicious investment decisions and project selection is a multidisciplinary task. But many a times this is considered doubt, have played an important role in contributing systematic methods for forecasting the future and evolving appraisal methods to quantify socials costs and benefits, but they alone can not carry out complete appraisal of an investment proposal. The need for project appraisal and investment decisions based on social profitability arises mainly because of the basic characteristics of developing countries limited resources for development and multiple needs - objective of planning being `Economic Growth with Social Justice'. The project appraisal is a convenient and comprehensive fashion to achieve, the laid down objectives of the economic development plan. The appraisal work presupposes availability of a certain minimum among of reliable and up to date data in the country, as well as the availability of trained persons to carry out the appraisal analysis.

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As stated earlier the investment decision of public sector projects are required to be taken within the approved plan frame work. The Project Appraisal Division (PAD) that prepares the comprehensive appraisal note of projects of Central Plans was therefore set up in Planning Commission. The Finance Ministry issues expenditure sanction for a11 investment proposals within the frame work of annual budget. The plan Finance Division and the Bureau of Public Enterprises of the Finance Ministry are also required to examine and give comments on the investment proposals of public. Based on the above assumptions, the cost of generation could be worked out discounted cash flow basis taking 12% IRR (Internal Rate of Return). This rate has been generally accepted by various appraising agencies of the power projects. Feasibility Report based on above methodology and indicating site selection, coal linkage, power distribution examined by Central Electricity Authority in all cases where investment is Rs.l Crore and above. Since NTPC is public sector undertaking, all the investment decisions have to be formally sanctioned by Government after PIB's (Public Investment Board's) clearance. SHARE CAPITAL : The entire share capital is owned by Government of India. During the Year no addition has been made. However the authorized capital has been increased from Rs. 80,000 million to Rs.1,00,000 million and the face value or share has been split to Rs.10/each from Rs.1000/- each.

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CAPITAL BUDGETING IN NTPC

All finance activity commences with an investment proposal, which calls for a financial appraisal of a project. Here, capital Budgeting has its role. Each one of the projects is appraised on following basis.

Cost Estimates. Cost Generations.

Cost Estimates : Feasibility Report of the project is prepared based on the cost of similar units prevailing at the time of preparation of projects report of the latest costs are not available, the same should be escalated. Collection of data with regard to the cost of the various equipment should from part of a continuous planning so tat a realistic cost estimate is made for the project Reports for civil works are generally based on NTPC schedule of rates with reasonable premium there on. Cost of Generation : The financing of public sector company is generally based on Debt Equity of 3:1 the general rate of interest chargeable by the central Government on loan components is 10.5% ( Now enhanced to 11%) . The plant life as provided under the Electricity Supply Act, 1948 is 25 years and depreciation based on this period has to be calculated on straight line method, on 90% of the cost fixed assets. The operation & maintenance expenses are generally of the order 2.5% of the capital cost.

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ROLE OF FINANCE MANAGEMENT IN INVESTMENT DECISIONS IN NTPC Finance Manager is the number of a project team. He plays an important role in investigation stage of the project, when various alternatives are analysed & the most optimum solution is decided upon. The soundness upon the accuracy of the data & as a finance manager has to questing and satisfy himself on the validity of the data. The power projects are extremely capital intensive and before large resources are committed to a scheme a detailed feasibility study need to be prepared covering The need of the project The demand projections The alternatives of the site locations The broad parameters of the plant and equipment The cost estimates The viability of the scheme. Cost Estimates :Cost estimates and financial justification and returns of the projects are the areas where financial management has to play its role. Cost estimates should be prepared by the cost engineers and vetted by the finance manager. Cost engineering is a specialized filed & need to be developed in the contest of power projects because of insufficient cost data on the components of the projects. This raises an important question of the present methodology of preparing the cost estimates without any provision for price contingencies. Because of time lag between preparation of cost estimates and investment decisions, updating. after its scrutiny by the appraising agencies, these estimates are already out of data and hence would need

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TURN OVER PHYSICAL: You would happy to know that your company maintained its position as the largest generator of electricity in the country. During the year your company has generated more than on fourth ( 26.51%) of the total electricity generated in the country with less than one firth ( 19.44%) of India's total generation capacity NTPG's coal and gas based stations generated 138.28 billion units of electricity as compared the previous years generation of 133.18 billion units an increase of 3.8% over the previous year. FINANCIAL : Over all bases figures making an increase of 6.9% on year to year basis are as under Rs. Million 2010-11 2011-2012

Energy sales including energy Internally Consumed

1,90,206

1,77,868

Consultancy protect Management And supervision fee

269

285

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[ Including key construction Project]

1,90,475

1,78,153

GENERATION AND SALES

GENERATION IN MUS - SALES IN MILLIONS Interpretations: A) On the X- airs year are been shown from 2006-07 to 2011-12 and the value has been increasing from year to year

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b) In the year 2002-03 the generation and sale has been 117890-160183 where as on the year 2007-08 it has been increased to 169203-192372 c) By observing the generation and sales chat we can sap there is a change from year to year

NET WORTH AND NET ASSETS

Interpretations: a) Net worth and net assets has been increasing from year to year from 2002-03it is 229045 and compare to 2007-08 it has been increased to 440201
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b)

By observing the chat we can say the net worth and net assets has been increasing from 2002-03 to 2007-08

NET BLOCK AND GROSS FIXED ASSETS

Interpretations: a) b) From 2002-03 the net block and gross fixed assets is 229045 Where as the Net block and gross fixed asset is been increased in the year 2007-08 compare
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PROFIT AFTER TAX

Interpretations: a) The chart shows the increase value after the deduction of tax in the year 2007-08

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b)

The profit is changing from year to year in the year 2002-03 it is 34245 where as increasing value in the year 2003-2004and decreased value in the year 2004-2005 By this we can say there is a complete variation from year to year

Distribution of revenue 2011-12

Interpretations: -

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a) b)

In the year 2007-08 the revenue is distributed in the from of fuel retained earning, dividends in latest finance change, depreciation and for employees Where as in the year 2007-08 it is been fluctuated the rates compare to the year 2007-08

NTPC On-Going Capacity addition profile:

SI.No. 1. i) ii) iii) 2. i) ii) 3. i) ii) iii) iv)

Project Northern Region : Rihand - II Feroz Gandhi Unchahar-III Koldam HEPP Eastern Region : Khahalgaon-TI (Phase-I & Ii) Barh Western Region: Vindhyachal - III Sipat - 1 Sipat - II Joint Venture with SAIL TOTAL:
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Capacity 1000

On-going 500 (500 MW already commissioned)

210 800

210 800

1500 1980

1500 1980

1000 1980 1000 500 9970

1000 1980 1000 500 9470

CONCLUSIONS

From the study of project cost estimates it has been noticed that the originally sanctioned amount had been incurred obtaining cabinet approval with the result the cabinet faced with a fast accomplishment. It is aware that several projects taken up 6-7 years ago, now about to complete has been affected considerably by inflation in the wake of the west Asia war & the increase in oil prices. Due to technical difficulties many of the project have taken a long time for Commissioning resulting in considerable cost overseas. During the examination of same of the revised cost estimates, PIB had occasion of note that the FRs. Originally prepared were often inadequate The cost of same of the project has gone up by 100 or more The administrative ministries monitoring the progress of these projects were Aware of the increased costs but in most cases no action was taken to seek revised sanction. There is an imperative need for enforcing greater financial discipline.

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SUGGESTIONS
1. The moment the project authorities became aware of the increased casts, it is Necessary to draw up a revised approval of the cabinet. 2. It is essential administrative ministries make full use of the existing institutions & devote greater attention in the preparation of adequate feasibility report. 3. If detailed project report is prepared with in a reasonable time, it should be Possible for the authorities to ascertain the cost of project 4. There should be a system of continues monitoring & close self-liason. 5. It is essential to tighten up the existing procedures 8v take a serious view of cases when the project authorities do not came up for sanction of revised cost estimates even when they are aware of the cost exceeding the sanction. 6. In the light of above, there should be a review of the progress in regard the preparation of project * initiate action urgently to finalized them bring them before competent authority as required.

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BIBLIOGRAPHY

Financial Management - I.M. Panday. Annual Report of NTPC. Finance for Non-Finance executive Report. Detailed Project Reports of RSTPS.

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