Capital Budgeting in BHEL

BUSINESS STUDIESBHARAT HEAVY ELECTRICALS LIMITED

Brightening LivesPowering ProgressThe customer is centric to all activities in a business organisation.The real challenge is all about marshalling the resources in pursuit of customer excellence.

--Ashok K. Puri,Chairman and Managing Director,BHEL

Birth of an Industrial GiantThe power equipment industry was established in India with the setting up of the first plant of BHEL at Bhopal in 1956(under Heavy Electricals India Limited-HEIL).Today,BHEL is the only Navratna company in the engineering sector.

Spread of OperationsWith 180 products under 30 major product groups,BHEL caters to the core sectors of Indian economy- Power, Industry, Transportation, Transmission, Oil and Gas, Renewable Energy etc.

Employment OpportunitiesBHEL has a workforce of nearly 43,500 employees at 14 manufacturing divisions,eight service centres and four power sector regional centres,besides over 100 project sites spread all over India and abroad.All the major units\divisions have been upgraded to the latest ISO-9001:2000 version quality standard certification.BHEL has also secured ISO-14001 certification for environmental management systems and OHSAS-18001 certification for occupational health and safety management systems.

In service of the NationBHEL sets generate 73% of the total power in the country while accounting for 65% of Indias total installed generating capacity of 1,23,668 MV(as on Dec.31,2013).That translates into nearly three out of every four homes in India being lit up with power generated by BHEL sets!

Harnessing Solar Energy

Leaps of SuccessOver 70% of the locomotives on Indian Railways(the second largest railway network in the world) are powered by BHEL built traction electrics.Technologies have been developed and commercialised for exploiting non-conventional sources of energy.These include wind electric generators,solar photovoltaic(PV) cells and modules,solar lanterns, solar heating systems etc.

WORK IN PROGRESS

GLOBAL REACHBHEL is one of the largest exporters of engineering products and services from India.Over the years,BHEL has established its reference in over 60 countries-from United States in the west to New Zealand the other side of the world.

PEOPLE IN THE FOREFRONTSo far 52 BHEL employees have won 40 Prime Ministers Shram Awards for their outstanding achievements leading to higher productivity,improved quality and foreign exchange savings.

A Responsible Corporate citizenAs part of its Corporate Social Responsibility BHEL has adopted 56 villages in the vicinity of its manufacturing plants throughout the country.The company has also joined the United NationsGlobal Compact,a partnership between the UN,the business community,international labour and NGOs..

A Growing Industrial Unit at Bangalore

Significant Landmarks (Part-I)1956 - First manufacturing plant of BHEL set-up at Bhopal under Heavy Electricals(India)Limited1969 - BHELs entry into Indias Power Sector with supply and installation of a 30 Megawatt Steam Turbine Generating set at Basin Bridge in Tamil Nadu1970 - BHEL supplied and commissioned first hydro set (33 MV rating) at Obra Hydro Power Station in U.P

Significant Land marks (Part-II)1971 - Bags first export order for boilers for Tuanku Jafar Thermal Power Station,Malaysia1976 - BHEL received the first overseas turnkey contract for 2*120 MV Tripoli West Thermal Power Station in Libya.

Significant Landmarks (Part-III)1980 - Commissions first 120 MV unit at Tripoli West Power Station of Electricity Corp.,Libya 1984 - Commissions Indias first 500 MV Steam Turbine Generator set at Trombay Thermal Power Station of Tata Power Company1989 - The first BHEL manufactured 25kV AC locomotive for hauling passengers and goods trains was supplied to Indian Railways

Significant Landmarks (Part-IV)1993 - Sets up Gas Turbine based Power Project(2*Frame 6) at Connaught Bridge Power Station in Malaysia in a record time of six months

Capital Budgeting Techniques Project Evaluation and Selection Potential Difficulties Capital Rationing Project Monitoring Post-Completion Audit

Project Evaluation: Alternative Methods Payback Period (PBP) Internal Rate of Return (IRR) Net Present Value (NPV) Profitability Index (PI)

Payback Period (PBP)PBP is the period of time required for the cumulative expected cash flows from an investment project to equal the initial cash outflow.0 1 2 3 4 5 -40 K 10 K 12 K 15 K 10 K 7 K

PBP Strengths and WeaknessesStrengths: Easy to use and understand Can be used as a measure of liquidity Easier to forecast ST than LT flowsWeaknesses: Does not account for TVM Does not consider cash flows beyond the PBP Cutoff period is subjective

Internal Rate of Return (IRR)IRR is the discount rate that equates the present value of the future net cash flows from an investment project with the projects initial cash outflow.CF1 CF2 CFn (1+IRR)1 (1+IRR)2 (1+IRR)n+ . . . ++ICO =

IRR Acceptance Criterion No! The firm will receive 11.57% for each dollar invested in this project at a cost of 13%. [ IRR < Hurdle Rate ] The management of Basket Wonders has determined that the hurdle rate is 13% for projects of this type. Should this project be accepted?

IRR Strengths and Weaknesses Strengths: Accounts for TVM Considers all cash flows Less subjectivityWeaknesses: Assumes all cash flows reinvested at the IRR Difficulties with project rankings and Multiple IRRs

Net Present Value (NPV) NPV is the present value of an investment projects net cash flows minus the projects initial cash outflow.CF1 CF2 CFn (1+k)1 (1+k)2 (1+k)n+ . . . ++- ICONPV =

NPV Acceptance Criterion No! The NPV is negative. This means that the project is reducing shareholder wealth. [Reject as NPV < 0 ]The management of Basket Wonders has determined that the required rate is 13% for projects of this type.Should this project be accepted?

NPV Strengths and Weaknesses Strengths: Cash flows assumed to be reinvested at the hurdle rate. Accounts for TVM. Considers all cash flows.Weaknesses: May not include managerial options embedded in the project. See Chapter 14.

Profitability Index (PI) PI is the ratio of the present value of a projects future net cash flows to the projects initial cash outflow.CF1 CF2 CFn (1+k)1 (1+k)2 (1+k)n+ . . . ++ICOPI =PI = 1 + [ NPV / ICO ]>Method #2:Method #1:

PI Strengths and Weaknesses Strengths: Same as NPV Allows comparison of different scale projectsWeaknesses: Same as NPV Provides only relative profitability Potential Ranking Problems