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Chapter-I: INTRODUCTION
• Introduction
• Importance of investment decision
• Objective of the study
• Methodology
• Limitations
• Introduction
• Pre-Independence
• Post-Independence
• Major Steel Industries in India
• Global Scenario
• Market Scenario
• Production Scenario
• Demand- Availability Projection
• Pricing &Distribution
1
Chapter-III: COMPANY PROFILE
• Introduction
• Background
• Mission
• Vision
• ISO Policy
• Objectives
• Core values
• Quality Policy
• Environmental policy
• Energy policy
• OSHAS policy
• HR policy
• Customer policy
• IT policy
• VSP Technology : state of the Art
• Major Departments
• Functions of various departments of RINL \ VSP
• Inputs and Basic Infrastructure
• Corporate Strategic Management(CSM)
• Achievements & Awards
Table Representation
A. Steel Industries
B. Major Sources of Raw Materials
C. Major Units
D. Main Products of VSP
E. Parameters of Sintering Machines
F. Production performance
G. Commercial performance
H. Financial performance
I. Man power at a Glance in VSP
2
Chapter-IV: PROJECT PLANNING
• Introduction
• Nature of investment decisions
• Process of Investment decisions
• Importance of Investment decisions
• Types of Investment decisions
• Investment Evaluation criteria
• Cost effective Analysis
• Project planning
• Sources of finance
• Payback period
• Average rate of return
• Net present value
• Internal rate of return
• Profitability index method
3
Chapter-IX: FINDINGS, SUGGESTIONS
• Findings
• Suggestions
CHAPTER – I
Introduction
4
1.1. Introduction:-
A project is an activity sufficiently self- contained to permit
financial and commercial analysis. In most cases projects
represent expenditure of capital funds by pre- existing entities
which want to expand or improve their operation.
In general a project is an activity in which, we will spend
money in expectation of returns and which logically seems to
lead itself to planning. Financing and implementation as a unit,
is a specific activity with a specific point and a specific ending
point intended to accomplish a specific objective.
To take up a new project, involves a capital investment
decision and it is the top management’s duty to make a
situation and feasibility analysis of that particular project and
means of financing and implementing it financing is a rapidly
expanding field, which focuses not on the credit status of a
company, but on cash flows that will be generated by a specific
project.
Capital budgeting has its origins in the natural resource
and infrastructure sectors. The current demand for
infrastructure and capital investments is being fueled by
deregulation in the power, telecommunications, and
transportation sectors, by the globalization of product markets
and the need for manufacturing scale, and by the privatization
of government –owned entities in developed and developing
countries.
The capital budgeting decision procedure basically involves
the evaluation of the desirability of an investment proposal. It is
obvious that the firm most have a systematic procedure for
making capital budgeting decisions. The procedure for making
capital budgeting decisions.
The procedure must be consistent with the objective of
wealth maximization. In view of the significance of capital
budgeting decisions, the procedure must consist of step by step
analysis.
5
1.2 Importance of investment decisions:-
1.4 METHODOLOGY
The information for the study is obtained from two sources namely.
1. Primary Sources
2. Secondary Sources
Primary Sources:
It is the information collected directly without any references. It is mainly
through interactions with concerned officers & staff, either individually or
collectively; some of the information has been verified or supplemented with
personal observation. These sources include.
Secondary Sources:
This data is from the number of books and records of the company, the
annual reports published by the company and other magazines. The
secondary data is obtained from the following.
1.5 Limitations:
Though the project is completed successfully a few limitations
may be there.
a) Since the procedure and polices of the company will not allow to
disclose confidential financial information, the project has to be
completed with the available data given to us.
8
CHATER-II
INDUSTRY PROFILE IN
INDIA
9
Introduction
2.2 Pre-independence:-
10
2.3 Post-independence:-
11
Licenses were given for
setting up of many mini steel
plants and re-rolling mills.
Govt. Of. India accepted setting up two more
steel plants in south. One each at Visakhapatnam
and Hospet (Karnataka).
12
Visakhapatnam steel plant had
foreseen a 7% growth during the
entire plan period.
13
The global steel industry has witnessed several
revolutionary changes during the last century. The
changes have been in the realms of both technology & business
strategy. The ultimate object of all these changes is to remain
competitive and open global market.
14
Japan remained the largest exporter of
semi finished and finished steel
products in 2002 followed by Russia and Ukraine.
15
In 2003-04 finished steel production was
36.193Mt.
Pig iron production in 2003-04 was 5.221Mt.
Sponge iron production was 80.85 Mt during the year 2003-04
The annual growth rate of crude steel production in 2002-03was 8%
and in 2003-04 was 6%.
(In Million
tons)
YEAR PIGIRON SPONGEIRON
0.1.1.1 FINISHEDST
EEL
2000-01 3.39 5.44 29.27
2001-02 4.08 5.44 30.63
2002-03 5.28 6.44 33.67
2003-04 3.76 8.09 39.12
2004-05 3.18 9.93 41.15
2005-06 4.39 0.00 30.84
2006-07 3.52 0.00 31.40
2007-08 4.95 0.00 29.74
2008-09 4.95 0.00 29.74
45
40 2000-01
35
2001-02
30
25 2002-03
20 2003-04
15 2004-05
10 2005-06
5
2006-07
0
PIGIRON SPONGEIRON FINISHED 2007-08
STEEL
16
Demand-Availability of iron and steel in the
country is projected by ministry of steel
annually.
Gaps in availability are met mostly through imports.
Interface with consumers by way of Steel Consumer Council exists,
which is conducted on regular basis.
Interface helps in redressing availability problems, complaints
related to quality.
17
CHAPTER –III
COMPANY PROFILE
18
Introduction:-
Steel comprises one of the most important resources of the economy.
History shows that, the strongest of civilizations have evolved quickly in the
course of time, because of the proper use of the iron and steel reserves they
had. The huge iron pillars at the entrance of New Delhi suggest that the history
of iron and steel industry in India is well over 2000 years old.
Steel comprises one of the most important inputs to all sectors of the
economy. Steel Industry is both a basic and a core Industry. The economy of
any nation depends on a strong base of Iron and Steel Industry in that nation.
History has shown that the countries having a strong potential for Iron and
Steel Industry have played a prominent role in the advancement in the
civilization in the world. Steel is such a versatile commodity that every object
we see in our day-to-day life had use, such as small items as nails, pins, needles
etc., to surgical instruments, agricultural implements, boilers, ships, railway
materials, automobile parts. The great investments that has gone into the
fundamental research in Iron and Steel Technology has helped both directly
and indirectly many modern fields of today’s science and technology. Steel is
versatile and indispensable item. The versatility of steel can be traced mainly
of three reasons.
Iron and Steel making as a craft as been known to India for a long time.
However, its production is significant quantities only after 1900.
VSP by successfully installing & operating efficiently Rs. 460 cores
worth of Pollution Control and Environment Control Equipments and
converting the barren landscape by planting more than 3 million plants has
made the Steel Plant, Steel Township and surrounding areas into a heaven of
lush greenery. This has made Steel Township a greener, cleaner and cooler
place, which can boast of 3 to 4° C lesser temperature even in the peak summer
compared to Visakhapatnam City.
VSP exports Quality Pig Iron & Steel products' to Sri Lanka, Myanmar,
Nepal, Middle East, USA, China and South East Asia. RINL-VSP was awarded
19
"Star Trading House" status during 1997-2000. Having
established a fairly dependable export market, VSP plans
to make a continuous presence in the export market.
Sl.
COLLABORATED
No. STEEL PLANT BY
Durgapur steel
1 plant Britain
2 Bhilai steel plant Erstwhile USSR
3 Bokaro steel plant Erstwhile USSR
Rourkela steel
4 plant Germany
The Project was estimated to cost Rs.3, 897.28 cores based on prices as on
4th Quarter of 1981. However, on completion of Construction of the whole
Plant in 1992, the cost escalated to around 8500 Cr. Unlike other interagated
Steel Plants in India, Visakhapatnam Steel Plant is one of the most modern
Steel Plants in the country. The plant was dedicated to the nation on 1st August
1992 by the then Prime Minister, P.V.Narasimha Rao.
20
Visakhapatnam steel plant technology: state-of-the-art:-
21
Water supply:-
Power supply:-
Operational Power requirement of 180 to 200 MW is being met
through captive Power Plant. The capacity of the power plant is 286.5 MW.
Visakhapatnam Steel Plant is exporting 60MW power to Andhra Pradesh State
Electricity Board.
Major Units:-
Major Units
Annual
Depa
rtme Capacity Units (3.0 MT Stage)
nt (‘000 T)
Coke Ovens 2,261 4 Batteries of 67 Ovens & 7 Meters. Height
2 Sinter Machines of 312 Sq. Meters. grate area
Sinter Plant 5,256
each
Blast Furnace 3,400 2 Furnaces of 3200 Cu. Meters. volume each
Steel Melt Shop 3,000 3 LD Converters each of 133 Cu. Meters.
Volume and Six 4 strand bloom casters
LMMM 710 4 Strand finishing Mill
4 Strand high speed continuous mill with no
WRM 850
twist finishing blocks
MMSM 850 6 STAND FINISHING MILL
Vision:
Deliver high quality and cost competitive products and be the first
choice of customers.
people.
Mission:-
Objectives:-
● Expand plant capacity to 6.3 million ton by 2011-12 with the Mission
to expand further in subsequent phases as per the corporate plan.
Core values:-
Commitment.
Customer Satisfaction.
Continuous Improvement.
Quality Policy:-
objectives.
products.
Environment Policy:-
employees.
Energy Policy:-
OSHAS Policy:-
Visakhapatnam Steel Plant is committed to occupational health and
safety of employees and contract workers. To accomplish this, the will,
Document, implement, maintain and periodically review the
policy.
employees.
the effectiveness of the training so that the quality of the training also
gets updated.
requirements.
the means and facilities and also access to the relevant information and
literature.
Customer Policy:-
I.T. Policy:-
Major Departments:-
Raw Material Handling Plant:
VSP annually requires quality raw materials viz. Iron Ore fluxes
(Lime stone, Dolomite); coking and non coking coals etc. to the tune of
12-13 Million Tones for producing 3 Million Tones of Liquid Steel. To
handle such a large volume of incoming raw materials received from
different sources and to ensure timely supply of consistent quality of
feed materials to different VSP consumers, Raw Material Handling
Plant serves a vital function. This unit is provided with elaborate
unloading, blending, stacking & reclaiming facilities viz. Wagon
Tipplers, Ground & Track Hoppers, Stock yards Crushing plants,
Vibrating screens, Single/ twin boom stickers, wheel on boom and
Blender reclaimers. In VSP peripheral unloading has been adopted for
the first time in the country.
Number of batteries 4
Number of ovens in batteries 67
Coal handling capacity of 31.6 tones
ovens
Dimensions of oven 16m length x 7m height
28
29
Sinter Plant Department:-
Sinter is a hard and porous lump obtained by agglomeration of lines of
iron ore, coke, limestone and metallurgical waster. This department by not
wasting the powder and small pieces of iron ore coal manganese, dolomite and
limestone makes Sinter Cakes and put it for reuse. This increases the
productivity of Blast Furnace, improves the quality of pig iron and decreases
30
Blast Furnace:-
Pig iron/hot metal is produced in blast furnace. The furnace is named
as blast furnace as it is running with blast at high pressure with a temperature
of 1150oC.
Raw materials required for iron making are iron ore, sinter coke and
limestone. For one tone of hot metal production, 310Kgs. iron ore, 1390Kgs.
sinter and 627Kgs. of coke with some other additives.
For production of pig iron/hot metal there are two blast furnaces
named Godavari and Krishna. They are of the largest and most modern
furnaces in the country.
31
Steel Melt Shop:-
Hot metal produced in blast furnace contains impurities like carbon,
sulphur, phosphorus, silicon, etc.; these impurities will be removed in steel
making by oxidation process.
There are three LD converters to convert hot metal in to steel, after the
conversion of hot metal in to steel, the steel is subjected to homogenization
treatment and cast in to blooms in continuous casting machines.
Rolling Mills:-
Blooms cannot be used as they are in daily life. These blooms have to
reduce in size and properly shaped to fit for various jobs. Rolling is one of the
mechanical processes to reduce larger size sections in to smaller cones. The
cast blooms are heated and rolled in to various long products of different
specifications at three high capacity sophisticated high-speed rolling mills.
32
Wire Rod Mill:-
WRM is a stand mill and is fully automated with computers. The mill
consists of 2.5 stands and a capacity of 850,000 tonnes per annum. The mill
product mix includes rounds and ribbed wire in the sizes of 5.5 mm to 12.7 mm
dia. wire rods are made in coil having maximum weight of 1200 Kgs. Liquid
Steel produced in LD Converters is solidified in the form of blooms in
continuous Bloom Casters. However, to homogenize the steel and to raise its
temperature, if needed, steel is first routed through, Argon rinsing station,
IRUT (Injection Refining & Up temperature) / ladle Furnaces.
Wire Rod Mill is fully automated & sophisticated mill. The billets are
rolled in 4 strand, high-speed continuous mill having a capacity of 8, 50,000
Tonnes of Wire Rod Coils. The mill produces rounds in 5.5 - 14 mm range and
rebars in 8, 10 & 12 mm sizes. The mill is equipped with standard and
Retarded Stelmore controlled cooling lines for producing high quality Wire
rods in Low, Medium & High carbon grade meeting the stringent National &
International standards viz. BIS, DIN, JIS, BS etc. and having high ductility, uni-
form grain size, excellent surface finish.
33
Medium Merchant & Structural Mill (MMSM):
This mill is a high capacity continuous mill. The feed material to
the mill is 250 x 250 mm size bloom, which is heated to rolling
temperatures of 1200 °C in two walking beam furnaces. The mill is
designed to produce 8,50,000 tons per annum of various products such
as rounds, squares, flats, angles (equal & unequal), T bars, channels,
IPE beams I HE beams (Universal beams)
AUXILIARY FACILITIES:-
Power plant also meets the Air Blast requirements of Blast Furnaces
thro' 3 Turbo blowers each of 6067 NM 3 / hr capacity.
Traffic Department:-
A steel plant of the size of VSP has to handle around 60 to 65 MT
traffic comprising of incoming traffic in the form of raw materials and
34
outgoing traffic in the form of finished or saleable
steel, and also the in process traffic such as cast
pig iron, mill scrap, hot metal.
35
spread throughout the plant including 3 Nos. of 60
MW Turbo-Generators, 1 No of 67.5M TG in TPP, 2
no's of Back Pressure Turbo Generators of 7.5 MW each and 2 Nos. of
Gas Expansion Turbo- Generator of 12 MW each. The services provided
are as mentioned below.
36
Utilities Department:-
Utilities dept. Consists of 1. Air Separation Plant 2. Compressor
Houses 3. Chilled water plants and Acetylene plants. The ASP is
designed to meet the maximum daily demand of gaseous oxygen,
gaseous nitrogen and gaseous argon. Compressor Houses produce
Compressed Air required for the operation of pneumatic devices, for
instruments and controls, pneumatic tools and for general purpose in
the various production units of Steel Plants. Chilled Water plants ( 2
No's ) produce chilled water required for use in the ventilation and air
conditioning system in areas such as office rooms, electrical control
room etc. Acetylene plant produces Acetylene gas required for general
purpose cutting and welding.
37
Roll shop & Repair shop is in the complex of
Rolling Mills catering to the needs of mills in
respect of roll assemblies, guides few Maintenance spares and roll
pass design. Geographically this dept. is in three areas as roll shop-1,
Roll shop-II and Area Repair Shop. The main activities of this shop is
Roll pass Design, grooving of rolls, assembly of rolls with bearings,
preparation of guides and their service and manufacture / repair of mill
maintenance spares.
For the first time in the country, VSP has adopted CNC
technology for grooving of steel rolling mill rolls. High constant
respective accuracy, higher productivity, use of standard tool for any
groove turning, elimination of the use of different templates, easier to
incorporate groove modification etc., are some of the advantages of
CNC lathes over the conventional one.
Plant Design:
Major functions of this unit are
38
FUNCTIONS OF VARIOUS
DEPARTMENTS OF RINL/VSP:
Directorate of Operations
Mines planning:-
39
Formulation of annual and monthly production
plans for BF limestone, BF grade dolomite, Mn
Ore and Sand at VSP Captive Mines.
Projects planning:-
Information Technology:-
40
Systems and Procedures:-
Project Division:-
Construction Department:-
41
§ Arranging PAT/FAT will all concerned
departments like works, design, consultants and
suppliers in terms of contract and handing over the unit to works
department for operation.
Contracts Department:
42
• Accounting of all minority transactions and
preparation of financial statement of the
company and getting the same audited as required under law.
• Maintaining records with regard to the cost of products produced
by the company.
• Release of payments to suppliers/providers of goods and services.
• Release of salaries to the employees.
• According concurrence to proposals for investments &
expenditure as per the policies, procedures and the Delegation of
Powers.
• Conduct Internal Audits, Stock Verification and Statutory
compliance.
• Making working capital arrangements.
• Submission of periodical reports to banks as per their sanctioned
terms.
• Organizing for payment of Central Excise, Sales Tax, Income Tax
and other statutory payments.
Directorate of Personnel
Personnel Department:-
Manpower Planning,
Employees’ induction,
Service matters, policy & rules
Industrial relations,
Employees’ welfare
Legal Affairs:
43
Management Services:
Quality Circle,
Suggestion Scheme,
Incentive Scheme,
Reward Scheme,
Leadership Training,
Team Building
Skill Training.
Management Development.
Electrical Maintenance,
44
Water Supply,
Directorate of Commercial:-
Marketing Department:-
It has 24 no. of Branch Sales Offices all over India and four
Regional Offices viz. North Delhi, South – Chennai, West –
Mumbai, East – Kolkata and Headquarter Sales. Main Activities
of Marketing are as follows:
Collecting Market feedback and Customers requirements for the
preparation of Annual Plan in coordination with Works
Department, for the sale of Pig Iron Steel and Byproducts
Preparation of Marketing Policies
45
Preparation of Monthly Rolling Plans in
coordination with Works Department for
meeting the sale commitments
46
Storage of materials & issue the same to the
Production Units as per their requirement.
To develop and encourage ancillary industries so that the
availability of the materials at right time is ensured.
47
MILE STONES OF THE ORGANIZATION:-
48
23 28-03-1990 “GODAVARI” the first Blast
Furnace commissioned
24 03-05-1990 Prime Minister decided “GODAVARI” to the nation
LIQUID SALABLE
YEAR HOT METAL
STEEL STEEL
4500
4000
3500
production in tons
3000
Hot metal
2500
Liquid Steel
2000
Salable Steel
1500
1000
500
0
1
9
00
00
00
00
00
00
00
00
00
-2
-2
-2
-2
-2
-2
-2
-2
-2
00
01
02
03
04
05
06
07
08
20
20
20
20
20
20
20
20
20
years
51
COMMERCIAL PERFORMANCE:
The commercial performance of VSP for the past four years is as follows:
SALES DOMESTIC
52
Commercial Performance Line Chart (In crores):
12000 900
800
10000
700
8000 600
SALES
500
6000 DOMESTIC
400
EXPORTS
4000 300
200
2000
100
0 0
2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-
2001 2002 2003 2004 2005 2006 2007 2008 2009
FINANCIAL PERFORMANCE:
VSP had to bear the burnt of huge project cost right from the day of its
inception. This has affected the company’s balance sheet due to very high
interest burden. The company, in spite of making operating profit every year
had to report net loss during all financial years. This on the other hand had
resulted in making VSP to take great care in planning the financial resources.
The financial performance of VSP for the past ten years is as follows:
53
FINANCIAL PERFORMANCE (In crores):
54
4000
3500
3000
2500
2000
1500
1000
500
0
2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-
2001 2002 2003 2004 2005 2006 2007 2008 2009
55
Manpower at a Glance in VSP
2004-2005 2005-2006
As on 31/3/2005 As on 30/04/2006 As on 31/05/2006
Executives 3257 3225 3520
Works 1994 2142 2140
Projects 145 227 227
Mines 51 53 53
Others 1067 1103 1100
Junior officers 1255 1105 1104
Works 925 776 775
Projects 21 27 27
Mines 20 22 22
Others 280 280 280
Non Executives Works 12101 11932 11923
Projects 10778 10673 10676
Mines 73 74 62
Others 289 281 281
961 904 904
Total Works 16613 16561 16547
Projects 13697 13590 13591
Mines 239 328 316
Others 360 356 356
2317 2287 2284
56
Manpower at a Glance in VSP
57
Organisational Chart of Visakhapatnam Steel
Plant
CHAIRMAN-CUM-MANAGING DIRECTOR
58
Director Director Director Director Director
CVO
(Projects) (Personnel) (Finance) (Commercial) (Operations)
ED ED ED
(F & A) GM
(Projects) (M M) ED (Vigilance)
Director (Works)
GM
(Projects) DGM(F&A) GM
(PM&MIS) IA & SV (Mktg.)
ED GM
(Projects) (CSM) GM
(Mines)
ED DGM GM GM
(P & IR) (CA & CS) (Maint.) (IT & SC)
DGM
(IT)
GM(Corp. GM GM GM
Pers&Coord.) (M & HS) GM (Corp (Automn.) (Power)
Planning)
GM GM GM GM
(P & A) (MS) (Elect.) (Operations)
GM GM (CD & GM
GM (Projects) Logistics) (Utilities)
(Trg&HRD
)
59
Comm.dt GM GM GM
(CISF) (TIC) (Const.) (E & S)
60
CHAPTER- IV
PROJECT
PLANNING
61
4.1 INTRODUCTION:-
An efficient allocation of capital is the most important finance function
in the modern times. It involves decisions to commit the firm’s funds to the
long - term assets. Capital budgeting for investment decisions is of
considerable importance to the firm since they tend to determine its value by
influencing its growth, evaluation of capital budgeting decisions.
62
Show the implicated of net present value (NPV) and internal rate
of
return (IRR)
Describe the Non- DCF evaluation Criteria. Payback period and
accounting rate of return (ARR).
Institute the competition of the discounted payback.
Compare and contract NPV and IRR and emphasize the
superiority of
NPV rule.
4. Fixing priorities.
7. Performance review.
63
capital expenditures planning committee in case of large organization or to the
officers a concerned with the corporate strategies and submits the suitable
proposals to the capital expenditures. Capital expenditures planning
committee in the case of large organization or the officers concerned with the
process of long-term investment decision.
Fixing priorities:-
After evaluating various proposals, the unprofitable proposals may be rejected
straight away. But it may not be possible for the firm to invest immediately in
the all the acceptable proposals due to limitation of funds. Hence, it is very
essentials to rank the various proposals and to establish priorities after
considering urgency, risk and profitability involved there in.
64
Proposals meeting the evaluation and other criteria are finally approved to be
included in the capital expenditure budget. However, a proposal involving
smaller investment may be decides at the lower levels for expenditure action.
The capital expenditures a budget lays down the amount of the estimation
expenditures to be incurred on fixed assets during the budget period.
Implementing proposals:-
Translating an investment proposal into a concrete project is a complex,
time consuming, and risk- fraught task.
1. Adequate formulation of projects
The major reason for delay is insinuate formulation of projects put
differently, if necessary homework in terms of preliminary comprehensive and
detailed formulation of the project.
Performance Review:-
65
Performance review, or post – completion audit, is a feedback device. It
is a means for comparing actual performance with projected performance. It
may be conducted, most appropriately. When the operations of the project
have stabilized.
It is useful several ways.
I. It throws light on how realistic were the assumptions underlying the
project.
II. It provided a documented log of experience that is highly valuable for
decision making.
66
activating within the firm. If packing manufacturing company invests in a new
plant and machinery to produce ball bearings, which the firm has not
manufactured before, this represents expansion of new business or unrelated
diversification. Sometimes a company acquires existing firms to expand its
business.
Independent investments
Independent investments serve different purposes and do not compete
with each other. For example, a heavy engineering company may have been
considering expansion of its plant capacity to manufacture additional
67
excavators and addition of new production facilities to manufacture a new
product.
Contingent Investments
Contingent investments are dependent projects; the choice of one
investment necessitates understanding one or more other investments for
example, if a company decides to build a factory in a remote, backward area, it
may have to invest in houses, roads, hospitals, schools, etc., and the total
expenditure will be treated as one single investment.
Evaluation Criteria:-
A number of investment criteria (or capital budgeting techniques) are in
use in practice. They may be grouped in the following two categories.
Capital Budgeting
Techniques
68
69
Payback = Initial Investment Co
Annual cash flow C
Co : Initial Investment
C : Annual Cash in flow
In case of UN equal cash inflows, the payback period can be found out
by adding up the cash inflows until the total is equal to the initial cash outlay.
Average income
Average 70
investment
A R R = x 100
DCF Criteria:
Net Present Valued Method (NPV):
The NPV present value (NPV) method is the classic economic method of
evaluating the investment proposals. If is a DCF technique that explicitly
recognizes the time value at different time periods differ in value and are
comparable only when their equipment present values- are found out.
C1 + C2 + C3 + ………
NPV= + Cn - Co
i=0 71
Cfi SV+WC
NPV= Σ +
(1+k) i
(1+k) n
Where
Cfi = Cash flows occurring at different point of time
k = the discount rate
n = life of the project in years
Co = Cash out lay
SV & WC = Salvage value and Working Capital at the end of the n years.
A
IRR= L+ (H – L)
(A – B)
Where
L : Lower discount rate at which NPV is positive
H : Higher discount rate at which NPV is negative
A : NPV at lower discount rate, L
B : NPV at higher discount rate, H
72
PV of cash inflow
PI =
Initial Cash
outlay
Where PV: Present Value
73
association with other development projects result in the achievement of
certain predetermined objectives such as the production of specified goods &
services?
Project planning is spread over a period of time and is not a one shot
activity. The important stages in the life of a project are:
It’s Identification
It’s initial formulation
It’s evaluation (Whether to select or to project)
It’s final formulation
It’s implementation
It’s completion and operation
The time taken for the entire process is the gestation period of the
project. The period of the project. The process of identification of a project
begins when we are seriously trying to overcome certain problems. They may
be non- utilization to overcome available funds. Plant capacity, expansion etc
74
1. Market and marketing
2. Site of the project
3. Project engineering dealing with technical aspects of the project.
4. Location and layout of the project building
5. Building
6. Production capacity.
7. Work Schedule
75
CHAPTER- V
PROJECT
FINANCE
76
Project financing is considered right from the time of the conception of
the project. The proposal of the project progress working capital, so, in general
a project is considered as a ‘mini firm’ is a part and parcel of the organization.
2. Installment Credit.
3. Advances.
4. Commercial papers
5. Commercial banks
6. Cash Credits
7. Over Drafts
8. Public Deposits.
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addition to short- term loans, company will raise medium term and long term
loans.
i) Equity Capital:
Equity Capital is also known as owner’s capital in a firm. The holders of
these shares are the real owners of the company. They have a control over the
working of the company. Different ways to raise the equity capital.
o Initial public offering.
o Seasoned offering
o Rights issue.
o Private placement
o Preferential allotment.
i) Debentures:
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Debentures are an alternative to the term loans and are instruments for
raising the debt finance. Debenture holders are the creditors of a company and
the company and the company have the obligations to pay the interest and
principal at specified times. Debentures provide more flexibility, with respect
to maturity, interest rate, security and repayment Debentures may be fixed
rate of interest or floating rate or may be zero rates. Debentures & Ownership
Securities help the management of the company to reduce the cost of capital.
♦ Venture Capital
♦ Seed Capital
♦ Bridge Finance
♦ Lease Financing
♦ Euro- Issues
a) Equity Capital:
1. Infusion of Government equity either from budgetary resources or
from Steel Development Funds (SDF).
2. Induction of equity by agencies/ companies who are setting up
separate stand alone blast furnaces or blast furnace based steel
plant complexes without captive coke oven plant.
3. Equity by overseas buyer suppliers of coking coal.
4. Equity by overseas buyer of coke, whom may hedge initial capital
invested and assured by buy – back arrangement for limited number
of years.
b) Loan Capital:
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1. Loan capital from financial installations like TDBI, IFCI, ICICI etc.,
guaranteed by the central Government who is the owner of RINI.
2. Surplus credit by major supplier of plant & equipment.
3. Providing loan by agencies that enter into an assured buy- back
arrangement at the terms and condition mutually agreed upon.
CHAPTER- VI
EVALUATION OF CAPITAL
BUDGETING
80
PROJECT EXPANSION OF VSP:
Project Schedule:
Stage –I 36 Months
81
Pay Back Period:
Income
(Profit Depreci Cash Cumulative
Sl.No Years After Tax) ation Inflows Cash In Flows
1 2005-06 1493 474 1967 1967
2 2006-07 1316 474 1790 3757
3 2007-08 1457 527 1984 5741
4 2008-09 2645 874 3519 9260
5 2009-10 3022 919 3941 13201
6 2010-11 3100 924 4024 17225
7 2011-12 3331 685 4016 21241
8 2012-13 3519 507 4026 25267
9 2013-14 3553 513 4066 29333
10 2014-15 3619 518 4137 33470
11 2015-16 3686 524 4210 37680
12 2016-17 3755 529 4284 41964
82
13 2017-18 3839 535 4374 46338
14 2018-19 3931 540 4471 50809
15 2019-20 4030 546 4576 55385
$
(a) Cash Outlay : 8692
= 3.10 years
It is assumed that the profit earning of the project will start from
2008-09.
83
May be any additional factor and other cause so rounding of
3.10 to 4 years will be right, so that it will give more assistance
To the calculation.
84
12 2016-17 4284 529 3755
13 2017-18 4374 535 3839
14 2018-19 4471 540 3931
15 2019-20 4576 546 4030
Average profit
ARR = x 100
Average investment
46296
= 3086.4
15
Average investment:
here the additional working capital is also taken the consideration while calculating the ARR.
investment
Average investment = + Ad. WC
2
8692
+ 702
2
= 5048
3086.4
ARR = x 100
5048
= 61.14%
85
Average Annual profit
ROI = x 100
Total initial investment
3086.4
ROI = x 100
8692
ROI = 35.51%
86
NPV:
87
Internal Rate of Return:
Discount rate taken as 18%
(in crores)
Present
Cash Values of
Sl.No Years Inflows DCF(18%) Inflows
1 2005-06 1967 0.847 1666.049
2 2006-07 1790 0.718 1285.220
3 2007-08 1984 0.609 1208.256
4 2008-09 3519 0.516 1815.804
5 2009-10 3941 0.437 1722.217
6 2010-11 4024 0.370 1488.880
7 2011-12 4016 0.314 1261.024
8 2012-13 4026 0.266 1070.916
9 2013-14 4066 0.225 914.850
10 2014-15 4137 0.191 790.167
11 2015-16 4210 0.162 682.020
12 2016-17 4284 0.137 586.908
13 2017-18 4374 0.116 507.384
14 2018-19 4471 0.099 442.629
15 2019-20 4576 0.084 384.384
Total Present Values of Inflows 15826.708
88
Discount rate taken as 35% (in crores)
IRR = L+ X (H – L)
A-B
15826.708 - 8692
= 18 + X (35-18)
15826.708 – 7659.6921
7134.708 X 17
= 18 +
8167.016
= 18 + 0.874 X 17
= 32.85
89
In this calculation, is done on the basis of trail and errors. By taking
various percentage of (DCF).So that an appropriate percentage of Internal
Rate of Return can be judge out.
Calculated figure is 32.85%, so we can take it as 35% cause at market
Uncertainty.
90
P. I = Cash Inflows
Cash Outflows
15026.62
=
8692
= 1.73
91
CHAPTER- VII
CAPITAL STRUCTURE
92
Framework for Capital Structure:
The FRICT analysis a financial structure may be evaluated from various
perspectives. From the owners’ point of view, return risk and value are
important consideration. From the strategic point of view, flexibility assumes
great significance. A sound capital structure will be achieved by balancing all
these considerations.
Flexibility:
The capital structure should be determined within the debt capacity
debt capacity of the company, and this capacity should not be exceeded. The
debt capacity of a company depends on its ability to generate future cash flows,
it should have enough cash to pay creditors’ fixed charges and principal sum
and leave some excess cash to meet future contingency. The capital structure
should be flexible. It structure should be flexible. It should be possible for a
company to adapt if warranted by a changed situation. It should also be
possible for a company to adapt its capital structure with a minimum cost and
delay if warranted by changed situation. It should also be possible for the
company to provide funds whenever needed to finance its profitable activities.
93
Timing: The capital structure should be feasible to implement given the
current and future conditions of the capital market. The sequencing of sources
of financing is important. The current decision influences the future options of
raising capital.
94
Theoretically, the financial manager should plan an Optimum Capital
Structure for his company. The optimum capital structure is one that
maximizes the market value of the firm. So far out discussion of the optimum
capital structure has been theoretical. In practice, the optimum capital
structure has been theoretical. In practice, the determination of an optimum
capital structure is a formidable task, and one has to go beyond the theory.
There are significant variations among industries and among companies
within an industry in terms of capital structure. Since a number of factors
influence the capital structure decision of a company, the judgment of the
person making the capital structure decision plays a crucial part. Two similar
companies may have different capital structures if the decision- makers differ
in their judgment of the significance of various factors.
A totally theoretical model perhaps cannot adequately handle all those
factors, which affect the capital structure decision in practice these factors are
highly psychological, complex and qualitative and do not always follow
accepted theory, since capital markets are not perfect and the decision has to
be taken under imperfect knowledge and risk.
analysis.
Capital Mix: Firms have to decide about the mix of debt and equity
capital. Debt capital can be mobilized from a variety of sources. How heavily
does the company depend on debt? What is the mix of debt instruments? Given
the company’s risks, is the reliance on the level and instruments of debt
95
reasonable? Does the firm’s debt policy allow it flexibility to undertake
strategic investments in adverse financial conditions? The firms and analysis
use debt ratios, debt-service coverage ratios, and the funds flow statement to
analyze the capital mix.
96
3. Cost of Debt (K0) is constant.
4. Cost of Equity (K0) increases with the degree leverage.
5. Corporate taxes do not exist...
3. Traditional Approach:
First Stage:
In the first stage Overall cost of capital is reduced or the value of the firm
is increased with increasing leverage. Cost of equity (Ke) remains constant or
there may be a slight rise because the increased use of debt increases the
financial risk to shareholders, only to some extent. But this rise is not
sufficient to offset the advantage derived than using cheaper source of debt.
Cost of debt (K0) remains constant since the proportion of debt is considered to
be within reasonable limit. As a result, with the use of more debt. A cheaper
source, the value of the firm increase or the overall cost of capital decreases
with increasing leverage (proportion of debt.)
Second Stage:
After reaching a certain level of debt, the degree of leverage has little or
no effect on the value or the overall cost of the firm. This is because the
advantage of low cost debit is offset by increased cost of equity. The cost of
equity is increased due to a higher financial risk. In this stage. Overall cost of
capital is minimum or the value of the firm is maximum.
97
Third Stage:
Beyond the acceptable limit, if the amount of debt is increased, the cost of
equity would show a great rise thus offsetting advantage of low cost debt.
Further, the cost of debt (Kd) also rises because the firm’s capacity to borrow
decreases. Thus, during this stage, the cost of capital increases or the value of
the firm decreases with leverage.
98
CAPITAL RESTRUCTURING IN VSP
A. FIRST CAPITAL RESTRUCTURING:
Objective:
The ensure viability and to prevent from becoming potentially sick under
sick industrial companies (Special Provisions) Act 1985 as the analysis made
in 1989 indicated non- viability even at 100% capability utilization due to high
capital related charges.
Approval Reference:
10 (13)/89- VSP (Vol- III) Dt. 26th July, 1993
Salient Features:
o Conversion of Rs. 1184 Crs Govt. of India Loans the Equity
Capital.
o Conversion of Rs. 1185 Crs Govt. of India loans into 7% non-
cumulative preference shares redeemable at the end of 10 years.
o Conversion of Rs.791, Crs interest due on Govt. of India loans into
interest free loan for a period of seven years.
o Conversion of Govt. of India loans receivable in 1992-1993 into
7% non- cumulative preference shares redeemable at the end of 10
years from the date of allotment (Rs. 419 Crs released after 31st July,
1992).
o Conversion of Govt. of India Loans receivable in 1993-94 into
preference shares to be decided after review.
o Waiver of penal interest that become due up to July, 1992
(Rs.149.40. Crores)
o Govt. of India ensures funds (Rs. 1507 Crs) in the plan period for
the project.
Challenges Set:
• 100% Capacity utilization by 1996-97.
99
• Cumulative losses to be wiped out by 2004-05.
Approval Preference:
10 (13)/89- VSP (Vol- III) Dt. 27th May, 1998.
Salient Features:
o Conversion of Rs. 542.47 Crs loan into 7% non – cumulative
preferences capital redeemable after 10 years...
o Conversion of Rs.791, Crs interest free loan to 7% non-
cumulative preference capital with effect from 31.03.1998
redeemable after 2000-01 with repayment schedule to be
communicated in due course.
100
o Reduction of loss by Rs. 235.85 Crs on account of interest saving
due to conversion of loans to preference capital retrospectively.
o Interest saving of Rs. 88.47 Crs. Per annum.
o Company could avoid attracting provisions of sick industrial
companies (Special Provisions) Act 1985.
101
CHAPTER – VIII
EVALUATION OF CAPITAL
STRUCTURING
102
1ST Condition:
When 70% of the project expenses is taken through loans (long term
Particular Amou
nt
EBIT 1629.000
Less : Interest
(8692 X 70%) = 6084. 4 Cr X 334.642
5.5% as int
EBT 1294.358
Less : Tax at 35% as on
1294.358 x 35% 453.025
EAT 841.333
Less: Pref. Share at 7% 322.646
Calculation of EPS:
Project cost 8692 Cr
Its 30% as equity
26076000000
No of Equity =
1000
= 26076000
103
For EPS = Earning’s to Equity (E to E)
______________________
No of Equity Share
8413330000
=
26076000
= 322.646
104
2 nd Condition:
When the mix ratio between debt & Equity is change as 70%
equity & 30% as debts. Then the level of impact,
With same assumptions
Particular Amount
EBIT 1629.000
Less : Interest
(8692 X 30%) = 2607.6 Cr X 5.5% 143.418
as int
EBT 1485.582
Less : Tax at 35% as on
1485.582 x 35% 519.954
EAT 965.628
Less: Pref. Share at 7%
(No – issue of pref. Share) ____
E To E 965.628
For EPS – Earning per share 158.706
EPS calculation:
8692 cr X 70% = 6084.4 Cr
Total Equity share value
No of Equity =
Value of the Share
So EPS = E to E = 9656280000
= 158.706
No of Equity 60844000
105
3rd Condition:
In this part debt Equity mix are divided in ratio 60:40 as debt as
60% and equity as 40%.
Particular Amou
nt
EBIT 1629.000
Less : Interest
(8692 X 60%) = 5215.2 Cr X 5.5% as int 286.836
EBT 1342.164
Less : Tax at 35% as on
1342.164 x 35% 469.757
EAT 872.407
Less: Pref. Share at 7%
(No – issue of pref. Share) ____
E To E 872.407
For EPS – Earning per share 250.922
EPS Calculations:
Project cost = 8692 Cr
40%as equity = 3476.80 Cr
Total Equity share value
No of Equity =
Value of the Share
1000
For EPS = E to E 8724070000
= = 250.922
No of Equity 34768000
106
CHAPTER- IX
FINDINGS,
SUGGESSIONS
107
FINDINGS:
The payback period of the project in VSP is 3 years and 10 months. The
payback period is less than the target period so the project may be
accepted.
The NPV of the project is positive than the value of the capital.
The estimated cash flows of the project include interest and tax.
108
For expansion project the mix of Capital structure (6: 4) is also best for
the company, but equity to be raised and debt to be lowered.
SUGGESSIONS
The payback period of the project in VSP is 3 years and 10 months. The
payback period is less than the target period so the project may be
accepted.
The NPV of the project is positive than the value of the capital.
The best Capital restructuring mix is 70: 30, because it having EPS
(Equity per Share) value is higher than the other mixes.
109
It also maintains 60: 40, but equity to be raised.
110
BIBLIOGRAPHY:
URL: http://www.vizagsteel.com
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