TABLE OF CONTENT
EXECUTIVE SUMMARY .......................................................................................3 RESEARCH METHODOLOGY ..............................................................................4 NEED .......................................................................................................................................... 4 SCOPE ........................................................................................................................................ 4 OBJECTIVE OF STUDY ........................................................................................................... 4 DATA COLLECTION ................................................................................................................ 4 LIMITATION ............................................................................................................................. 5
INTRODUCTION TO INDIAN OIL ........................................................................6 BACKGROUND......................................................................................................................... 6 VISION OF IOCL ....................................................................................................................... 7 MISSION OF IOCL .................................................................................................................... 8 VALUES OF IOCL..................................................................................................................... 8 OBJECTIVES OF INDIAN OIL ................................................................................................ 8 PRODUCTS PROFILE (IOCL) .................................................................................................. 9
LITERATURE REVIEW ........................................................................................11 INTRODUCTION TO CAPITAL BUDGETING...................................................12 HOW TO PREPARE A CAPITAL BUDGET OF A COMPANY .......................................... 14
CAPITAL BUDGETING IN INDIAN OIL CORPORATION LTD. .....................16 FINANCIAL ANALYSIS ........................................................................................................ 18 DETERMINATION OF CASH FLOWS ................................................................................. 19 INITIAL INVESTMENT .......................................................................................................... 19 OPERATING CASH FLOWS .................................................................................................. 19 TERMINAL CASH FLOW ...................................................................................................... 22 PROJECT LIFE......................................................................................................................... 22 ISSUES REQUIRING SPECIAL CARE – CASH FLOWS .................................................... 22 FINANCIAL EVALUATION .................................................................................................. 24 1
INTERNAL RATE OF RETURN (IRR) .................................................................................. 24 NET PRESENT VALUE (NPV) .............................................................................................. 25 SUMMARY OF FINANCIAL ANALYSIS ............................................................................. 26 PRE-REQUISITES FOR BUDGETING .................................................................................. 27
PREPARATION OF BUDGET ESTIMATES .......................................................28 BRIEF DESCRIPTION: ........................................................................................................... 29 2. JUSTIFICATION OF THE PROPOSAL: ........................................................................... 31 ADVANTAGES: ...................................................................................................................... 32
ANALYSIS ..............................................................................................................39 RECOMMENDATION ...........................................................................................39 CASE STUDY ON ..................................................................................................40 CAPITAL BUDGETING ........................................................................................40 INTRODUCTION ..................................................................................................................... 40 PROPOSAL .............................................................................................................................. 41 FINANCIAL ANALYSIS ........................................................................................................ 43 PROJECT COST DETAILS ..................................................................................................... 43 RESITEMENT vs. NEW SYSTEM DEVELOPMENT ........................................................... 45
BIBLIOGRAPHY ....................................................................................................46
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EXECUTIVE SUMMARY In today„s era of globalization and competition, coping up with technological advancement, which is undergoing evolution at a very fast rate, holds the key to the survival and growth of any organization. Installing technology, well-equipped facilities or going for modification in the existing ones are the means to attain better performance efficiency and hence further the value addition. Indian Oil, the largest commercial enterprise of India (by sales turnover) is India„s sole representative in Fortunes prestigious listing of world„s 500 largest corporations, ranked 135th for the year 2007. To maintain strategic edge in the market place, Indian Oil has given importance to capital budgeting because capital investment decisions often represent the most important decisions taken by an organization, and they are extremely important, they sometimes also pose difficulties. The evaluation of projects should be performed by a group of experts who have no axe to grind. It is necessary to ensure that an impartial group scrutinizes projects and that objectivity is maintained in the evaluation process. A company in practice should take all care in selecting a method or methods of investment evaluation. The criterion selected should be a true measure of the investment„s profitability (in terms of cash flows), and it should lead to the net increase in the company„s wealth (that is, its benefits should exceed its cost adjusted for time value and risk). It should also be seen that the evaluation criteria do not discriminate between the investment proposals. They should be capable of ranking projects correctly in terms of profitability. The NPV method is theoretically the most desirable criterion as it is a true measure of profitability; it generally ranks projects correctly and is consistent with the wealth maximization criterion
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RESEARCH METHODOLOGY
NEED
The Project study is undertaken to analyze and understand the Capital Budgeting process in Indian Oil Corporation, which gives mean exposure to practical implication of theory knowledge.
To know about the company‟s operation of using various Capital Budgeting techniques.
To know how the company gets funds from various resources.
SCOPE The project deals with the capital budgeting as general and how the capital budgeting aids in various important findings and provides useful information for decision making.
OBJECTIVE OF STUDY
To study the relevance of capital budgeting in evaluating the project for project finance
To study the technique of capital budgeting for decision- making.
To make suggestion if any for improving the financial position if the company.
To understand the practical usage of capital budgeting techniques
To understand the nature of risk and uncertainty
DATA COLLECTION The study has been conducted using Secondary data alone. Given the nature of the topic, use of Primary data was not warranted. The Secondary data collection methodology is: 4
For Qualitative data, the Company website and interaction with the Company guide was used.
For Quantitative data, Company reports and internal records were used.
LIMITATION
Scarcity of Secondary data
Past research conducted in this area has been insufficient
Non availability of confidential data
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INTRODUCTION TO INDIAN OIL BACKGROUND
Oil & Gas is one of the most important factors contributing to the economic development of a Country. The production and consumption of oil & Gas in a country has become a barometer of its growth and prosperity. The origin of oil & gas industry in India can be traced back to 1867 when oil was struck at Makum near Margherita in Assam. At the time of Independence in 1947, the Oil & Gas industry was controlled by international companies. India's domestic oil production was just 250,000 tonnes per annum and the entire production was from one state Assam. The foundation of the Oil & Gas Industry in India was laid by the Industrial Policy Resolution, 1954, when the government announced that petroleum would be the core sector industry. In pursuance of the Industrial Policy Resolution, 1954, Government-owned National Oil Companies ONGC (Oil & Natural Gas Commission), IOC (Indian Oil Corporation), and OIL (Oil India Ltd.) were formed. ONGC was formed as a Directorate in 1955, and became a Commission in 1956. In 1958, Indian Refineries Ltd, a government company was set up. In 1959, for marketing of petroleum products, the government set up another company called Indian Oil Company Ltd. In 1964, Indian Refineries Ltd was merged with Indian Oil Company Ltd. to form Indian Oil Corporation Ltd. During 1960s, a number of oil and gas-bearing structures were discovered by ONGC in Gujarat and Assam. Discovery of oil in significant quantities in Bombay High in February, 1974 opened up new avenues of oil exploration in offshore areas. During 1970s and till mid 1980s exploratory efforts by ONGC and OIL India yielded discoveries of oil and gas in a number of structures in Bassein, Tapti, Krishna-GodavariCauvery basins, Cachar (Assam), Nagaland, and Tripura. In 1984-85, India achieved a selfsufficiency level of 70% in petroleum products.
Oil exploration and production in India is done by companies like NOC or National Oil Corporation, ONGC or Oil and Natural Gas Corporation and OIL who are actually the oil companies in India that are owned by the government under the Industrial Policy Rule. The 6
National Oil Corporation during the 1970s used to produce and supply more than 70 percent of the domestic need for the petroleum but by the end of this amount dropped to near about 35 percent. This was because the demand on the one hand was increasing at a good rate and the production was declining in a steady rate. Oil Industry in India during the year 2004-2005 fulfilled most of demand through importing oil from multiple oil producing countries. The Oil Industry in India itself produced nearly 35 million metric tons of Oil from the year 2001 to 2005. The Import that is done by the Oil Industry in India comes mostly from the Middle East Asia. The Oil that is produced by the Oil Industry in India provides more than 35 percent of the energy that is primarily consumed by the people of India. This amount is expected to grow further with both economic and overall growth in terms of production as well as percentage. The demand for oil is predicted to go higher and higher with every passing decade and is expected to reach an amount of nearly 250 million metric ton by the year 2024.
IOCL (Assam Oil Division) The Digboi Refinery in North Eastern was commissioned in 1901, is today India's oldest operating refinery and one of the oldest operating refineries in the world. In fact, it was the only refinery in India till the mid 1950's. Earlier owned and operated by the Assam Oil Company ltd. It came into the fold of the Indian Oil Corporation ltd. by an Act of Parliament on 14th.October 1981 and became Assam Oil Division of Indian Oil Ltd. Today, Indian Oil‟s Digboi Refinery, with a capacity to process .65 million tons of crude oil, has been revitalized through the successful completion of a number of major projects.
VISION OF IOCL A major diversified, transnational, integrated energy company, with national leadership and a strong environment conscience, playing a national role in oil security & public distribution.
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MISSION OF IOCL IOCL has the following mission:
To achieve international standards of excellence in all aspects of energy and diversified business with focus on customer delight through value of products and services and cost reduction.
To maximize creation of wealth, value and satisfaction for the stakeholders.
To attain leadership in developing, adopting and assimilating state-of- the-art technology for competitive advantage.
To provide technology and services through sustained Research and Development.
To foster a culture of participation and innovation for employee growth and contribution.
To cultivate high standards of business ethics and Total Quality Management for a strong corporate identity and brand equity.
To help enrich the quality of life of the community and preserve ecological balance and heritage through a strong environment conscience.
VALUES OF IOCL Values exist in all organizations and are an integral part of any it. Indian Oil nurtures a set of core values:
CARE
INNOVATION
PASSION
TRUST
OBJECTIVES OF INDIAN OIL IOCL has defined its objectives for succeeding in its mission. These objectives are:
To serve the national interests in oil and related sectors in accordance and consistent with Government policies.
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To ensure maintenance of continuous and smooth supplies of petroleum products by way of crude oil refining, transportation and marketing activities and to provide appropriate assistance to consumers to conserve and use petroleum products efficiently.
To enhance the country's self-sufficiency in crude oil refining and build expertise in lying of crude oil and petroleum product pipelines.
To further enhance marketing infrastructure and reseller network for providing assured service to customers throughout the country.
To create a strong research & development base in refinery processes, product formulations,
pipeline
transportation
and
alternative
fuels
with
a
view
to
minimizing/eliminating imports and to have next generation products.
To optimize utilization of refining capacity and maximize distillate yield and gross refining margin.
To maximize utilization of the existing facilities for improving efficiency and increasing productivity.
To minimize fuel consumption and hydrocarbon loss in refineries and stock loss in marketing operations to effect energy conservation.
To earn a reasonable rate of return on investment.
To avail of all viable opportunities, both national and global, arising out of the
Government of India‟s policy of liberalization and reforms.
PRODUCTS PROFILE (IOCL) The Products produced by IOCL are broadly classified into the following cases: Class A: 1. Liquid Petroleum Gas (L.P.G) Class B: 2. Motor Spirit (M.S.)/Gasoline 3. Super Kerosene Oil (S.K.O) 4. High Speed Diesel Oil (H.S.D) 9
Class C: 5. High Speed Diesel Oil (H.S.D) 6. Furnace Oil (F.O.) 7. Bitumen 8. Naphtha 9. Aviation Turbine Fuel (A.T.F) Class D: 10. Mineral Turpentine Oil (M.T.O) 11. Jute Batching Oil (J.B.O) 12. Light Diesel Oil (L.D.O) 13. Unleaded petroleum 14. Fuel & Feedstock 15. Super Kerosene Oil
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LITERATURE REVIEW 1) Agnė Keršytė (Kaunas University of Technology, Lithuania): Capital budgeting decisions are among the most important decisions made by business entities. Companies have patterns that guide how investment opportunities are identified and how investment decisions are made. During capital budgeting process investments compete for scarce corporate resources and some projects survive the intrinsic selection process while others don‟t. The most significant deficiency of corporate capital investment studies is their limited focus on project evaluation and risk analysis tools rather than on the entire investment decision-making process. 2) Davina F. Jacobs (IMF Working Paper): A key challenge in government budgeting is to define an appropriate balance between current and capital expenditures. Budgeting for government capital investment also remains not well integrated into the formal budget preparation process in many countries. Her paper aims to provide an overview of past and current budgeting practices for public investment. The study also provides a comparison between the budget practices between low-income countries and developed countries and makes a series of recommendations for how to ensure efficient integration of capital planning and budget management in low-income countries. 3)
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INTRODUCTION TO CAPITAL BUDGETING The Capital Investment plays very vital role for growth and financial health of any company. Such investments are necessary for continued growth of organization, updating of technology, removal of operational bottlenecks, improvement in efficiency and productivity, enhancement of capacities, fulfillment of social objectives etc. Capital Investment decision would generally include expansion, acquisition, modernization and replacement of long-term assets. Capital investment decisions require special attention due to following reasons:
Growth: The effects of investment decisions extend into the future and have to be endured for a longer period than the consequences of the current operating expenditure. Company‟s decision to invest in long-term assets has a decisive influence on the rate and direction of its growth. A wrong decision can prove disastrous for the continued survival of the company; unwanted or unprofitable expansion investment in assets would make it difficult for the company to compete successfully and maintain its market share.
Risk: Long-term commitment of funds may also change the risk complexion of the company. If adoption of an investment increases average gain, but causes frequent fluctuations in its earnings, the risk profile of the company increases. Thus investment decisions shape the basic character of a company.
Funding: Investment decisions generally involve large amount of funds, which make it imperative for the company to plan its investment programmes very carefully and make advance arrangement for procuring finances internally or externally.
Irreversibility: Investment decisions are irreversible. It is difficult to find a market for such capital items once they have been acquired. The company will incur heavy losses if such assets are scrapped. Further, fixed annual charges without commensurate income may endanger very survival of an organization.
Complexity: Investment decisions are among the company‟s most difficult decisions. They are an assessment of future events, which are difficult to predict.
It is really a
complex problem to correctly estimate future cash flows of an investment. An economic, political, social and technological force causes the cash flow uncertainty. 12
Capital budgeting involves determining the most advantageous investment options for your small business's liquid assets. Accountants use several complex calculations to analyze possible investment returns, but many small businesses lack personnel with awareness of the complexity of capital budgeting. Simply estimating yearly returns in cash flow doesn't offer your small business an accurate representation of an investment's real return value. Capital budgeting is the process of determining whether or not an investment is worthwhile. Often companies will have several opportunities and must measure each one's potential in order to make a comparison and choose just one or a few. For example, a company might be trying to determine whether to buy new equipment to expand production capacity on an existing product, or to invest in research and development for a new product. The three main methods of taking this measurement are Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period. IRR Internal Rate of Return is a percentage very similar to an interest rate, and is used to compare a capital investment against other kinds of investment. Divide the expected profit by the expected expenditure, and you'll arrive at a percentage of returns. Then look at the company's other projects and determine the minimum acceptable percentage of return; this is called the hurdle rate. If the IRR is higher than the hurdle rate, the project is worth pursuing. The IRR is easy to understand, and is thus the most commonly used technique, though the NPV is more accurate. NPV Net Present Value, or NPV, combines two concepts of value. First, it determines how much cash will flow in as a result of the investment, and compares that against the cash that will flow out in order to make the investment. Since these flows take place over time, and often the investment will pay off much later, we also take into account the present and future value of money. Because of inflation, money earned in the future is worth less in today's dollars than the same amount would be today. Therefore, NPV calculates all of those inflows and outflows over time, takes inflation and foreign exchange rates into account, and expresses the final benefit to the company in terms of today's dollars. 13
Payback Period Very simply, the payback period tells you how long it will take to recover your investment in a project. If it will take one year to make back the investment from revenues from a new product, the payback period is 1. The payback period method is antiquated and falling into disuse, because it has some significant drawbacks. It doesn't take into account the time value of money, and it tends to favor very cyclical products that make the bulk of their money up front, rather than those that build momentum and can produce cash inflows over a long period. Multiple Techniques Most companies use multiple techniques for all of their capital budgeting decisions. There are a number of minor methods, such as profitability index and sensitivity analysis, which can also be employed in making decisions. Since each method looks at the investment from a different perspective, it is best to employ multiple analyses and take the opportunities with the best return according to all techniques.
HOW TO PREPARE A CAPITAL BUDGET OF A COMPANY Budgeting is essential to the success of any business, regardless of size. Different types of budgets, however, are crucial to a company‟s profit or loss. Capital assets, such as equipment, buildings and vehicles, are not typically replaced for some time. Capital budgeting helps determine whether or not a long-term investment is in the company‟s best interest. The two types of budgets don‟t each exist separately but as part of an integrated whole. Understanding how they interact with each other is key in preparing your capital budget.
Step 1 Create a financial blueprint for your company‟s objectives. Establish what the current capital investment needs are in order to take the company to the next level. Prioritize necessary steps and items needed and set a time frame for asset acquisition.
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Step 2 Examine existing cash flow statements to determine your company‟s current costs vs. revenue.
Step 3 Calculate the projected cost of capital expenditures. Establish whether cash is available for asset acquisition or if long-term financing, which includes interest payments, is the likely method of funding. Each will substantially affect the bottom line.
Step 4 Consider alternatives to purchasing. Run calculations to see where cost cuts make sense. Evaluate how the capital expenditures will enhance the company‟s value overall.
Step 5 Consider the different related items that will affect the operating budget by the purchase of the capital expenditure and the method of payment. Once capital budget items are purchased, the costs of company operations typically increase. For example, if you purchase a new car, the monthly payments on this long-term asset and the cost of fuel and maintenance now affect your operating budget's bottom line.
Step 6 Create a spreadsheet using the collected data before making a decision. Include existing cash flow, projected costs for the long-term assets needed, total investment capital necessary and projected cash flow when the assets are in place. Indicate how and when the capital investment will be recovered. Project out by several years the long-term effect on the company‟s cash flow and total financial performance. Include depreciation and increase in value over time, if appropriate.
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CAPITAL BUDGETING IN INDIAN OIL CORPORATION LTD.
Capital Projects in IOC are broadly divided into: (a) Core-sector projects e.g. Refining, Marketing, Pipelines and R&D. (b) Diversification projects e.g. Exploration & Production (E&P), Liquefied Natural Gas (LNG), Petrochemicals and Power etc. (c) Globalization Projects – Core/ non-core sector projects overseas. (d) Merger / Acquisitions As per revised DOA effective from April 9, 2001, all capital investment proposals above Rs.100 crore require Boards approval as under: Above Rs.100 crore
:
Board
Above Rs.50 crore to Rs. 100 crore :
Planning & Project Committee of Board
Above Rs.10 crore to Rs. 50 crore :
Chairman
Up to Rs.10 crore
Functional Director
:
Project costing Rs. 250 crore and above require also approval of Project Evaluation Committee.
Dynamism of a corporation in the new business environment is often dependent on diversification of investment as well as modernization and expansion of existing projects. Capital investment analysis involves estimating and comparing the benefits of these schemes. It
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is an exercise that helps the Corporation to take a decision on the investment proposal under review. Five steps are basic in investment analysis. They are:
Need and Justification
Market and Commercial Assessment
Technical Feasibility Study
Financial Analysis
Sensitivity and Risk Analysis
The foremost issue that needs to be described in the Capital Investment Proposal pertains to identification of basic objective or need which is sought to be fulfilled by implementation of the proposed project. The Proposal shall present the complete perspective, rationale and background of need for the project. Market assessment helps strengthen the case for the project under review. The scope of market assessment is vast. As a tool for assessing the commercial dimensions of the project, it helps identify the critical market and economic factors such as demand for the product under review, scope for inter-product substitution, feasible pricing schemes that impinge on the profitability projections of the proposal etc. Technical feasibility study helps assemble the different components of production as
land and
site development, technology and equipment, material inputs, labor inputs, implementation schedule in to the relevant categories of investment (project) cost and operating (production) costs spread over the life of the project. From market assessment the revenue stream is set out against the expenditure stream from the technical studies. These two sets of inflows and outflows form the basis for developing the statements required for financial and economic analysis. On the building blocks of the market and commercial assessment along with technical feasibility studies, financial and economic analysis of the proposal are undertaken. Once the size of the investment is known assessment of project financing is made simultaneously. Financial analysis of a proposal helps in answering the questions:
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Is the proposal profitable?
Are the expected returns commensurate with the costs involved including borrowing costs?
Is the proposal profitable in terms of other investment opportunities?
Is it worthwhile investing in the project in terms of certainty of returns?
The final decision on a proposal is taken only after sensitivity and risk analysis. As the name suggests sensitivity analysis test the proposal‟s viability or profitability to modifications in few critical variables. The sensitivity of the project to the critical variables is thereby established. Risk analysis is a more comprehensive extension of sensitivity analysis as it seeks to examine the profitability of the capital invested subject to differing combinations of movements of the critical variables. Sensitivity analysis is the first step towards risk analysis. Both sensitivity and risk analysis enables the management to comprehend the sources of risk that a project is exposed to cover its projected life period. More important, it enables the corporation to undertake measures that help to mitigate risk either through risk sharing procedures or through hedging options.
FINANCIAL ANALYSIS The Financial analysis of a project is vital for assessing the viability of the project and hence provides valuable information to the decision-maker. Financial analysis produces an estimate of the financial gains, which will accrue, to the Corporation after implementation of the project. The financial analysis entails determination of year-wise cash flow of the project, computation of key decision criterion like internal rate of return (ROI & ROE), net present value (NPV) of cash flows, debt service coverage ratio (DSCR) and break even (BE) analysis etc. Financial analysis of capital investment proposals shall be carried out based on realistic set of assumptions duly considering present prices of input / output, market forces etc.
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DETERMINATION OF CASH FLOWS Determination of year-wise cash flows is the most crucial step of the financial analysis. The Cash flows shall be determined for three components namely:
Initial Investment
Operating Cash Flows
Terminal Cash Flows
INITIAL INVESTMENT This component of cash flow mainly represents net cash outlay in the period in which the asset is purchased or constructed. In other words, initial investment shall comprise of the total project cost as indicated in the capital investment proposal and shall also include incremental value of working capital, wherever required. While computing initial investment a care needs to be exercised in respect of following: In respect of proposals where financing through borrowings is envisaged, receipt / repayment of loans and payment of interest shall not be considered while calculating ROI. However, these are to be considered while calculating ROE.
OPERATING CASH FLOWS This component of cash flow presents year-wise cash flow generated from operations after the project has been commissioned. The capacity utilization shall not be more than 60% in the first year and at 90% from second year onwards till project life cycle. The determination of operating cash flows shall, therefore, entail estimating year-wise operating income, input/ raw material cost and operating expenses during the project life.
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OPERATING INCOME (a) Operating income of a project represents total realization or savings from the operations, after implementation of the project. (b) While computing the Gross operating income, following issues are to be kept in view: •
For Refinery projects, Refinery Gate Price (3 Years average excluding abnormal
fluctuation such as war situation etc.) based on import parity (80% of import parity and 20% of export parity) considering applicable ocean freight, ocean loss, ocean insurance, present duties, inland freight etc. as included in the price build up is to be reckoned. •
Sale prices of free trade products in target market and basis of adoption for it. For
petroleum products, 3 years average import parity (80% of import parity and 20% of export parity) prices on landed cost basis/ as per pricing policy of corporations are to be assumed. However, in case competitors‟ prices are lower than import parity then the same shall be used. Product-wise marketing margins shall be based on 8% mark-up or actual margin whichever is less are to be considered. •
The prices should take into account the impact of discounts including cost for extended
credit, freight under recovery etc. •
Further, in case any price cap by Govt. / Regulatory authority is applicable then it is to be
considered. •
Sale price of regulated products (if any) is to be considered as per policy of Govt. in this
regard. Subsidy component of any to be borne by Corporation is to be duly factored in. •
For Pipeline projects, alternate mode of transportation is to be considered as benchmark.
Freight is to be compared with alternate transportation mode for return on investments (cost of capital). In the base case, 70% of Notional Railway Freight (NRF) shall be considered as revenue generation. In case there is a tariff cap by regulating authority then it is to be considered. •
For diversification products, prices are to be considered based on competitors‟ prices or
Govt. policy in this regard.
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•
For new products, prices are to be based on landed cost of substituted products (based on
import parity). •
In case of Export Parity Price, selling price to be considered based on average 3 years
FOB price at nearest market having demand for similar or near similar product (excluding abnormal period) minus 5% to take care of the impact of extra supply in the market plus freight charges (ocean and inland)/ other charges. However, export incentives if available to be considered. (c) Here it is pertinent to mention that future pricing should factor in likely supply/demand situation and impact of likely substitution, if any. (d) For such projects where investment shall result in savings in costs, there shall be detailed calculations for cost in both cases i.e. cost without investments vs. cost with investment.
INPUT/ RAW MATERIAL COST a) Landed cost of inputs / raw material shall include all the incidental costs involved including present rate of custom duties. b) For refineries, crude cost may be considered based on 3-year average import parity prices of identified crude (excluding abnormal fluctuation such as war situation etc.). c) For Marketing projects, cost of procurement of products, including freight up to market / storage point is to be considered.
OPERATING EXPENSES (a) The operating expenditure of the project shall include the cost of chemicals and consumables, utilities (like power, water, and fuel) repairs and maintenance, wages and salaries, rent and insurance, depreciation, other administrative expenses etc. (b) The expenses under these various heads shall be estimated on a realistic set of assumptions and past experience, wherever applicable. The basis for estimating the expenditure shall be clearly indicated in the proposal.
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(c) A comparative analysis of the estimated operating cost with the similar existing operations shall also be indicated along with reasons for variations, wherever applicable.
TERMINAL CASH FLOW The cash flow in the terminal year of the project mainly represents the salvage value of the project plus release of incremental working capital. Salvage value shall be considered as under:
Land to be valued at original cost.
Other items to be valued at 30% of the original cost without financing cost.
Tax on capital gain should be considered. Capital gains shall be taken as terminal value minus written down value as per income tax act.
Terminal cash flow to be taken in 16th year.
PROJECT LIFE For cash flow determination and financial analysis, the life of project shall be assumed as 15 years from the date of completion, unless the project life is shorter.
ISSUES REQUIRING SPECIAL CARE – CASH FLOWS While determining the cash flows for the projects special care need to be exercised in respect of following: a) Cash inflow can occur by increase in cash revenue and / or cash saving through reduction in operating costs. b) Cash outflow can occur by increase in operating expenses and/ or decrease in cash revenue, apart from outgo for initial capital investment. c) The net cash flow shall be estimated on „after tax basis‟, as payment of taxes is an outflow of cash.
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d) For calculation of IRR, all financial charges arising due to financial leverage like interest payment / dividend payment shall not be considered as cash outflows. Similarly, tax shield/ benefit allowable due to such financial charges shall also not be considered as cash inflow / outflow. e) For calculation of ROE, interest outgo on project loans, tax shield available and principle payments shall be considered. In this case, initial capital outgo shall be limited to equity outgo. f) Corporate tax to be considered as under: •
Corporate tax to be considered on the project on stands alone basis.
•
No tax shields for loss, if any.
•
Loss, if any, to be carried forward for adjustment with future profit.
•
Minimum Alternative Tax (MAT) to be considered, wherever regular tax liability does not arise.
•
All deductions / rebates/ benefits etc. wherever available under the income tax act to be considered.
•
CenVat credit not to be considered.
g) While depreciation is not to be treated as the cash expenditure, depreciation tax shield shall be duly considered while computing the tax liability.
CASH FLOWS BASED ON CONSTANT PRICES
While preparing Cash Flow estimates, an issue, which is raised quite frequently, is whether such estimates shall be based on current prices or constant prices.
Forecasts in current prices, which include the effects of inflation do not give a realistic picture of the true financial profitability of a project, since, inflation can artificially improve apparent profitability by increasing future revenue as compared with today‟s capital costs.
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Further, no forward cost escalation is being considered while estimating the project cost. Therefore, future income, expenses and net revenues may be stated in constant prices or values based on today‟s investment price levels. However, the project cost shall also be prepared based on completion project cost.
FINANCIAL EVALUATION After determination of cash flow as per methodology enumerated above, the next logical step is to financially evaluate the proposal. The evaluation shall be carried out through following two methods:
Internal Rate of Return (ROI/ROE)
Net Present Value (NPV)
Both the above methods fully recognize the timing of cash flows through the process of discounted cash flows.
INTERNAL RATE OF RETURN (IRR) (a) Internal Rate of Return (IRR) is the discounting rate at which present value of cash inflow is equal to the present value of cash outflow. In other words, the discount rate that yields a ZERO Net Present Value is called Internal Rate of Return. (b) IRR shall be computed for all capital investment proposals and indicated in the Capital Investment Proposals. (c) Normally projects having IRR of less than Hurdle Rate (i.e. cost of capital + premium) shall not be considered as commercially viable and therefore, shall be fully justified on noncommercial grounds, wherever applicable. (d) For calculation of Return on Equity, interest outgo along with principle repayment is to be considered
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NET PRESENT VALUE (NPV) (a) The present value of a future sum of money can be found by discounting it to the present point in time or Year „O‟ at the required rate of return/ discount rate. Required rate of return shall not be less than cost of capital. (b) Under this method, the present value of each year‟s net cash flow is calculated, starting from the year „0‟ till complete project life i.e. 15 years. This discounting rate adopted shall be the Hurdle Rate. (c) If the project has a positive Net Present Value, the project is considered to be commercially viable. (d) Divisions shall indicate Net Present Value of all the projects at a discount rate of Hurdle Rate duly enclosing workings with the capital investment proposal.
OTHER MEASURES 1) For debt-financed projects, Debt Service Coverage Ratio (DSCR) is also to be calculated, so as to ascertain the debt serving capability of the project. DSCR is calculated as under:
Profit after tax+ Depreciation + Interest on long term loan Interest on long term loan + Loan Repayment installment
2) Break-ever analysis is a tool to ascertain the level of sales required to meet the funds requirement (fixed + variable). This can be used as a sensitive analysis tool and can be computed as under:
Total fixed cost Break Even Units = __________________________________ (BEU)
Unit Selling Price – Unit Variable cost
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BEUs are minimum sales units at which, project is just meeting its funds requirement and there is no loss or gain. 3) The computed IRR shall be compared with Benchmark IRR (hurdle rates). Hurdle rates shall be calculated based on Weighted Average Long Term Cost of Capital (WACC) along with project specific risk premium. Hurdle rates shall be revised annually after approval of competent authority.
SUMMARY OF FINANCIAL ANALYSIS
For the purpose of financial analysis of capital investment proposals, cash flow estimates shall be prepared for the full project life. These cash flow estimates along with calculation of ROI/ROE, NPV, and DSCR & Break Even analysis shall be attached to the proposal. While considering the base case, capacity utilization shall not be more than 90% (2nd year onwards) throughout the project life cycle for all projects. A statement of assumptions made for Financial Analysis shall be enclosed. In summary it may be stated that the more sophisticated and mathematical methods of investment appraisal, particularly NPV and IRR can have extremely useful applications so long as they are used appropriately. Divisions while using these methods shall have an appreciation of limitations of these methods. Though these methods do reckon time value of money, but results of these methods largely depend on the accurate forecasting of the future cash flow. Therefore, it is important that utmost care is exercised in correctly estimating the future cash flows.
OTHER INTANGIBLE BENEFITS Apart from carrying out the financial analysis of the proposal, it is equally important that the proposal shall also indicate other intangible benefits of the project. Normally, these are the benefits related to socio and strategic needs of the country. This includes projects for pollution control, safety needs, staff welfare etc. 26
A care needs to be taken while listing the intangible benefits of the project. The benefits, which can be quantified and measured, shall not be treated as intangible benefits. For example, a project for modernization of equipment may have a number of intangible benefits like lesser pollution, better safety etc. but it may also lead to higher productivity. The higher productivity shall be measured, quantified and considered for the purpose of financial and economic analysis of the proposal.
PRE-REQUISITES FOR BUDGETING Once the items or facilities in which the investments are needed are identified the next step is the initiation of the proposals. Any proposal that is initiated for inclusion in the budget shall be supported with the concept and the administrative approval, which inter-alia includes: a) Brief description of the project. b) Cost of the Project c) Justification of project d) Economics of the project e) Benefits.
27
PREPARATION OF BUDGET ESTIMATES 1. Budget formulation for Annual Plan Schemes Annual plan in respect of capital expenditure on plan schemes is required to be prepared every year as per the guidelines and formats from Corporate office. The data required to be submitted in this regard include project wise write up on approved or anticipated cost, physical status, outlay requirement, completion dates with reasons for variations for completed or continuing schemes. In the case of new schemes besides description of project, benefits, physical status of FR preparation and justification for out lay requirements are to be furnished.
2. Budget formulation for Non-Plan Schemes
Only new schemes, which have already been approved by the Competent Authority, should be included in the budget proposals.
All capital Budget proposals are to be formulated by user department in line with the Capital Budgeting and Project Appraisal Manual and subsequent guidelines issued in this regard, from time to time.
Budget proposals should be formulated in such a manner that 100% cash outlay is achieved by the end of the year. For this purpose, factors like constraints in execution of the projects and the capacity to spend should be taken into account.
Budget proposal should be formulated in such a manner that the incidence of the reappropriation during the year is minimized.
In respect of continuing schemes, it should be ensured that complete details viz. IR Number, Approval Reference and the Approving authority reference are provided in the respective columns.
28
BRIEF DESCRIPTION:
Digboi Refinery with an installed capacity of 1.0 MMTPA has Motor Spirit (MS), Superior Kerosene Oil (SKO), Aviation Turbine Fuel (ATF) and High Speed Diesel (HSD) as white oil products. These products are stored in various storage tanks at Oil Movement & Storage (OM&S). The various types of tanks at OM&S for above services are enumerated in Table-1:
Table - I
S. No Tank No.
Service
Capacity Type
1.
09
MS
5000
FLOATING
2.
10
MS
5000
FLOATING
3.
11
MS
5000
FLOATING
4.
26
MS
5000
FLOATING CUM FIXED
5.
27
MS
5000
FLOATING CUM FIXED
6.
83
MS-ISOSIVATE
2000
FLOATING
7.
84
MS-ISOSIVATE
2000
FLOATING
8.
00B2
MS-XP
200
FIXED
9.
00B3
MS-XP
200
FIXED
10.
00B6
MS-
500
FLOATING
500
FLOATING
MULTISERVICE 11.
00B7
MSMULTISERVICE
29
12.
13
SKO
5000
FIXED
13.
94
SKO
5000
FLOATING
14.
70
ATF
2000
FIXED
15.
78
ATF
2000
FIXED
16.
79
ATF
2000
FIXED
17.
12
HSD
5000
FIXED
18.
14
HSD
5000
FIXED
19.
16
HSD
2000
FIXED
20.
21
HSD
5000
FIXED
21.
22
HSD
5000
FIXED
22.
23
HSD
5000
FIXED
23.
28
HSD
5000
FLOATING
24.
29
HSD
5000
FLOATING
25.
93
HSD
5000
FLOATING
26.
00B5
HSD
800
FIXED
27.
00B4
HSD
800
FIXED
From Table – I it can be seen that high capacity majority of SKO & HSD tanks are of fixed roof type contributing to fugitive emission loss resulting in high fuel & loss of the refinery. Opportunity exists for reduction of loss by converting high capacity tanks of OM&S from fixed roof to floating roof. The Floating roof facilitates the reduction of evaporative loss that occurred the vapor space of fuels that were stored in fixed – roof tanks. It has not only proved effective for reducing emissions from the storage of volatile organic compounds when compared to fixed – roof tanks, but also helped to reduce the potential for vapor space explosions that regularly occur in fixed – 30
roof tanks. The floating roof also virtually eliminates the possibility of a boil over phenomenon that occurs in fixed – roof tank farms where crude oils are stored. Because of these advantages the floating roof is now used extensively throughout the industry to store petroleum and petrochemical substances in large quantities. As per Benchmarking report of Shell Global Solutions International, Storage and handling Index of Digboi Refinery for the year 2003-04 & 2004-05 are 429.4 and 458.8 respectively against Shell benchmark of 86.2 and these accounts to a gap of US$ 0.6 millions.
1. COST ESTIMATE
: Rs. 151.60 Lakhs
- Price used are based on which year
: 2008–09
- % of escalation amount
: 10 %
- % of custom duty/other duties
: N/A
Cost of conversion of roof from fixed to floating of Tank–13 is Rs. 151.60 Lakhs only. For cost estimation engineering services were asked to provide with basic cost estimation for various jobs of roof conversion from Fixed to Floating for tank-13. Based on cost estimation of engineering services detail cost estimation was prepared for the total job and material with 10 % escalation. As per total cost estimation Tank roof conversion of T-13 & 14 will cost Rs. 116.71 Lakhs.
2. JUSTIFICATION OF THE PROPOSAL: 3.1 Fugitive emission loss from Tank – 13 has been estimated to be 59.9 MT of SKO per Annum respectively.
3.2 By conversion of Roof from fixed to floating roof of Tank – 13 Digboi Refinery can save 60.0 MT of high valued petroleum products and earn extra revenue of Rs. 17.54 Lakhs/Annum with average 2005-06, 2006-07 & 2007-08 AOR prices of SKO @ Rs. 29281/MT.
3.3 Digboi Refinery„s Fuel & Loss is second highest among Indian refining sector and this proposal is towards improvement in this area. Details of loss and crude processing of Digboi 31
Refinery for last four years are enumerated in Table – II as below:
Table – II S. No
AOR
Crude Processed; MT
Loss; MT
Loss on % of crude
1.
2003-04
890655
4269
0.48
2.
2004-05
1002271
5250
0.52
3.
2005-06
863911
5083
0.58
4.
2006-07
839074
4364
0.52
5.
Average
898978
4742
0.53
3.4 Payback period of investment is 8.6 (Without CDM) & 8.2 (With CDM) Years and IRR on investment is 5.8% (Without CDM) & 6.5 %( With CDM) %.
3.5 Tank – 13 is higher capacity which accounts to high fugitive emission. 3.6 The project will attract additional recurring benefit of Rs. 0.85 Lakhs/Yr under Clean Development Mechanism (CDM).
3.7 GR inspection recommended for replacement of tank roof in 2006. 3.8 Being refinery located in heart of the city, the proposed facility will contribute towards corporation„s social commitment for cleaner environment.
ADVANTAGES:
SHORT TERM: As stated above in justification. LONG TERM: a) ALTERNATIVE OPTION CONSIDERED, IF ANY: N/A b) CONSEQUENCE (ON PRODUCTION/ PROFIT/ EFFICIENCY 32
ETC.,) IN CASE THE PROPOSAL IS NOT ACCEPTED:
i. ii. iii. iv.
LOSS OF PRODUCTION LOSS OF PROFIT LOSS OF EFFICIENCY OTHERS (PLEASE SPECIFY)
: YES : NO : YES : N/A
3. TECHNICAL FEASIBILITY: a) EFFECT OF ENVIRONMENT, IF ANY:
Yes, high ongoing fugitive loss
b) TECHNICAL CONSTRAINTS, IF ANY:
No
4. IMPACT OF PROPOSAL ON MANPOWER: a) WHETHER ADDITIONAL MANPOWER IS REQUIRED FOR RUNNING THE FACILITY. IF YES, PLEASE FURNISH THE DETAILS IN THE FORM OF AN ANNEXURE. : No b) IF ADDITIONAL MANPOWER IS REQUIRED, HOW THE SCHEME WILL BE MANNED: No c) WILL THE PROPOSAL RESULT IN SAVING MANPOWER FOR DEVELOPMENT IN OTHER JOBS: No
5. OPERATIONING AND MAINTENANCE COST:
No
6. REQUIREMENT OF ADDITIONAL WORKING CAPITAL, IF ANY: No (DETAILS TO BE ATTACHED)
7. ECONOMICS: a) NET SAVING
: Rs. 17.54 Lakhs (Without CDM) Rs. 18.39 Lakhs (With CDM)
b) PAY BACK PERIOD
: 8.6 Year (Without CDM) 8.2 Year (With CDM)
c) INTERNAL RATE OF RETURN
: 5.8 % (Without CDM) 6.5 % (With CDM)
d)
ANY OTHER CRITERIA USED
: Reliability & Social Commitment
33
9. PHASING OF EXPENDITURE: YEAR
Rs. (Lakhs)
2008
0
2009
151.6
8. CLASS OF PROPOSAL: Priority STATUTORY REQUIREMENT SAFETY ITEM ECONOMIC GROUNDS OPERATIONAL NECESSITY WELFARE / SOCIAL BENEFIT REPLACEMENT / ADDITIONAL OF ASSETS
Marks
x x √ x x x
20 20 18 16 14 12
9. LEVEL OF DESIRABILITY: Weightage x √ x
ESSENTIAL HIGHLY DESIRABLE DESIRABLE
5 3 1.5
PRIORITY RANKING: Priority marks DEPT. UNIT HEAD UNIT ED HEAD OFFICE
18 18 {}
Weightage marks
Total
3 3 {}
54 54 {}
In view of the foregoing, it is proposed to convert roof of Tank–13 from fixed to floating at an estimated cost of Rupees 151.6 Lakhs. The expenditure towards conversion of to be booked under Additional facility budget of 2008-09 & 2009-10.
34
LIST OF ANNEXURES: ANNEXURE – I
TOTAL COST ESTIMATION
ANNEXURE – II
BENEFIT ANALYSIS
ANNEXURE- III
COMPLETION SCHEDULE
ANNEXXURE – 1: TOTAL COST ESTIMATION
DESCRIPTION
VALUE ( in lakhs)
Equipment & Machinery
66.9
Erection charges
47.1
Civil works
23.8 137.8
Add: 10% contingency
13.8
Total expenditure
151.6
35
ANNEXURE - II
BENEFIT ANALYSIS Benefit calculation for Roof conversion of Tank-13 Annexure II
S. No Parameter
Value
Units
Remarks
1.
Total loss from T-13 with fixed roof
66.0
MT/yr
As per Annexure-III
2.
Total loss from T-13 with Floating roof
6.1
MT/yr
As per Annexure-III
3.
Saving by conversion of roof from Fixed to Floating for T-13
59.9
MT/yr
4.
Average SKO price
29281
Rs/Mt
5.
Monetary saving by conversion of roof from fixed to floating for T-13
1753881
Rs/Mt
6.
Total annual monetary saving
1753881
Rs/Mt
As per Avg Price of AOR 2005-06, 2006-07&2007-08
Rs.20.6 Lakhs/Yr.
Estimation of CDM Benefit for Roof Conversion of Tank-13 Calculation for CO2 emission reduction & CDM Parameters
Value
units
Projected fuel saving from Roof Conversion
59.9
MT/yr
Average density of Saved Oil
0.84
MT/m3
Calculated C:H ration of saved oil
6.47 36
Carbon content of saved oil
51.88
MT/annum
Reduction in CO2 emission due to saved oil(Considering 12 MT of C generates 44 MT of CO2) Equivalent Carbon credit (CER)
190
MT of CO2
190
CER
Prevailing price of CER (Based on inputs from M/S Ernst&Young) Prevailing conversion rate of Euro to INR
8
Euro/CER
56.18
Rs/euro
CDM benefit based on E&Y projection
0.85
Rs/Lakhs/annum
Parameters
Value
Units
Projected monetary saving in a year
17.54
SRFT/annum
CDM benefit based on E&Y Projection
0.85
Rs. Lakhs/annum
Total Investment cost for Roof Conversion System
151.58
Rs. Lakhs/annum
Annual Operating Cost for Floating Roof
0.00
Rs. Lakhs/annum
37
IRR calculation
Case-I Without considering CDM benefit
Case-II With CDM benefit
Units
Projected Annual Benefit (Benefit due to Loss reduction) Total investment cost for Roof conversion of Tank-13 & 14 Annual maintenance /operating cost
17.54
18.39
Rs.Lakhs/annum
151.58
151.58
Rs.Lakhs
0.00
0.00
Rs.Lakhs/annum
Pay –back period
8.6
8.2
year
Cash outflow in 2009 (100% of investment cost) Cash inflow in 2009 (considering 0% benefit in1st year) Cash inflow in 2010 (considering 75% benefit in 2nd year) Cash inflow in 2011
-151.58
-151.58
Rs.Lakhs
0.00
0.00
Rs.Lakhs
13.15
13.80
Rs.Lakhs
17.54
18.39
Rs.Lakhs
Cash inflow in 2012
17.54
18.39
Rs.Lakhs
Cash inflow in 2013
17.54
18.39
Rs.Lakhs
Cash inflow in 2014
17.54
18.39
Rs.Lakhs
Cash inflow in 2015
17.54
18.39
Rs.Lakhs
Cash inflow in 2016
17.54
18.39
Rs.Lakhs
Cash inflow in 2017
17.54
18.39
Rs.Lakhs
Cash inflow in 2018
17.54
18.39
Rs.Lakhs
Cash inflow in 2019
17.54
18.39
Rs.Lakhs
Cash inflow in 2020
17.54
18.39
Rs.Lakhs
Cash inflow in 2021
17.54
18.39
Rs.Lakhs
Cash inflow in 2022
17.54
18.39
Rs.Lakhs
Cash inflow in 2023
17.54
18.39
Rs.Lakhs
Internal rate of return (without considering financial cost)
5.8%
6.5%
%
38
ANALYSIS The project is accepted if the internal rate of return is higher or equal to the minimum required rate of return the minimum required rate of return is also known as cut off rate of firm cost of capital. A project shall be rejected if its IRR is lower than the cut off rate. As the IRR is found to be higher than the cut off rate the project is accepted.
RECOMMENDATION The project is to be accepted as the internal rate of return (IRR) is higher than the cut off rate i.e. the hurdle rate of the project.
39
CASE STUDY ON CAPITAL BUDGETING
RESITEMENT AND INSTALLATION OF WAX PELLETISATION UNIT FROM BARAUNI REFINERY TO DIGBOI REFINERY
INTRODUCTION 40
Wax production at Digboi refinery comprises of wax extraction from Pressable Wax Distillate (PWD) in Solvent Dewaxing Unit (SDU), hydrofinishing of deoiled wax in Wax Hydrofinishing Unit (WHFU) and finally moulding for paraffin wax in the form of slabs. Existing Wax Moulding Unit provides slabs of specified size (of about 6.25kg each) from 13 nos. of hydraulically operated plate & frame type moulding presses. Molten wax is solidified in the closed press by cooling which is followed by opening the press, removal of slabs, weighing and filling in the jute/HDPE bags (50kg) and stitching manually. Filled bags are manually shifted to the godown from where it is dispatched through trucks. The process of moulding of paraffin wax in place and frame type presses is very old, obsolete and manpower intensive. In view of frequent breakdowns, non-availability of ready spares and employment of huge operating staff (134 at present) in existing Moulding and Packaging Unit. The Unit needs modernization. For replacement of existing plant with a modernized unit Global tender was floated in April 2012 to obtain firm offer for automated wax moulding unit but the offers do not meet the qualification criteria and thus were rejected. In view of poor response from vendor, possibilities of utilization of existing idle Wax Pelletisation Unit at Barauni Refinery were explored. Facilities for production of wax at Barauni Refinery comprise of Wax Hydrofinishing Unit (WHFU) and Moulding & Packaging Unit (MPU) in the form of Pellets was commissioned in 1999. The unit had to be shut down due to non availability of waxy crude from Assam and became idle. Wax hydrofinishing along with MPU were written off and Wax Hydro-finishing Unit was sold based on “As is where is basis”. However, the Moulding & Packaging Unit of 32000 TPA capacity is available in the Barauni Refinery and most of the equipments are still in good condition. Since Digboi Refinery is planning to modernize the existing Wax Moulding Unit therefore the idle wax pelletisation unit from Barauni Refinery could be re-sized and installed at Digboi. Therefore a proposal was given to shift the existing idle wax pelletisation unit from Barauni refinery to Digboi refinery. A capital budget is to be prepared in order to find the feasibility of the proposal.
PROPOSAL 41
The proposal envisages the following: a) Dismantling of the wax pelletisation unit from Barauni Refinery. b) Transporting of dismantled unit to Digboi Refinery. c) Installation of wax pelletizing unit at Digboi Refinery. d) 3 * 370 KL tanks for storage of wax for feeding to Pelletization unit e) Associated piping, Civil electrical and instrumentation works
CAPITAL COST The existing idle Moulding and Packaging unit of Barauni Refinery for production of wax in Pellet form was written off along with Wax HFU. However, the cost of the Pelletization Unit will be evaluated for capitalization purpose at Digboi. The estimated cost of resitement of wax pelletization unit from Barauni to Digboi refinery is Rs. 1300 lakhs with an accuracy of +/- 10% based on in-house cost estimates.
OPERATING PHILOSOPHY: After resitement of Wax pelletizing unit from Barauni, it will be operated in three shift operation along with one shift operation of the existing Wax moulding unit for producing paraffin wax to the tune of 40000 TPA.
MANPOWER REQUIREMENT Digboi refinery has indicated 34 nos. manpower requirements for the wax pelletisation unit. As against this, the manpower for wax moulding unit is 134. Digboi refinery will operate the existing wax moulding unit in one shift only from current three operations after commissioning of wax pelletisation unit. The manpower requirement for one shift operation of wax moulding unit will be 33 only. Thus the total manpower requirement in future will be 67 only as against current of 134 and thus there will be manpower reduction of 67 nos. The surplus manpower will be adjusted against superannuation redeployment in marketing locations etc. However actual manpower requirement and redeployment will be done after a separate manpower study. 42
OPERATING COST The steam power and utility requirement for the operation for the wax palletizing unit is marginal and will be met from the existing facilities of the refinery. However, the estimated operating cost will be Rs.8.17 crore/year as against current operating cost of Rs.12.17 crore/yr. Hence will be a net savings of Rs. 4.54 crore/yr mainly due to reduction in 67 nos. of manpower.
FINANCIAL ANALYSIS The proposal is for modernization of the plant. Hence no financial analysis has been carried out. The project will create flexibility at Digboi refinery to supply wax in both Pellets and Slab form apart from savings in operating cost by Rs. 4.54 crore/yr.
COMPLETION SCHEDULE The job is expected to be completed within 17 months from the date investment approval of the proposal.
PHASING OF EXPENDITURE Based on execution & procurement schedule phasing of expenditure is as under:
Year
Total expenditure (lakhs)
1st
325
2nd
975
total
1300
PROJECT COST DETAILS
43
S. No.
Facilities
Amount (lakhs)
1
Resitement of plant including 2 new feed pumps
886
2
3 nos. feed tanks
213
3
PMC @ 7.5%
82
4
Contingency @ 10%
118
Total
1299
MANPOWER SAVINGS The proposal envisages only one shift operation of existing wax moulding unit (currently 3-shift operation) and 3-shift operation of wax pelletization unit after resitement. As against existing manpower of 134 nos. to run wax moulding unit, the revised manpower requirement will be 67 as detailed below.
Wax
Design Present operation
unit
cap TPA
WMU 43200 WPU Total
36000
Proposed future operation
No. of shift
Capacity TPA
Manpower No. of required shift
Capacity TPA
Manpower required
3
43200
134
1
14400
33
-
3
36000
34
50400
67
-
43200
134
44
Thus there would be a saving of 67 nos. manpower (50%) and can be re-deployed after accounting for superannuation, transfer to mktg div. etc. It is decided that re-sited WPU will be put in 3-shift operation along with 1-shift operation of existing WMU at Digboi with a total production capacity of about 50000 TPA as against present 43000 TPA capacities.
FINANCIAL IMPACT With proposed operating methodology, the operating cost excluding establishment shows an increase of Rs. 1.15Cr/yr. The savings in establishment cost is expected to be Rs. 5.7 Cr/yr.
RESITEMENT vs. NEW SYSTEM DEVELOPMENT Particulars
Proposed WPU
In case of new
Cost advantage
resitement
WPU installation
over new installation
P&M (except associated civil,
394
1160
766
886
1652
766
1300
2205
905
electrical & instrument items) P&M (except 3 nos. tanks, PMC, PMC & contingency) Overall cost (include 3 nos. feed tanks, PMC & contingency)
Therefore we could see that the proposal for the resitement of WPU from Barauni refinery to Digboi refinery has a cost advantage of Rs.905 lakh over new WPU installation.
RECOMMENDATION In view of the facts mentioned above data, it is proposed that proposal for resitement and installation of Wax Pelletisation unit from Barauni to Digboi refinery may be approved. 45
BIBLIOGRAPHY Annual reports of IOCL www.researchassistance.com www.iocl.com www.indiainbusiness.nic.in www.informaworld.com www.corporateinformation.com www.business-standard.com www.ccsenet.org/journal.html Journals of IOCL www.investopedia.com www.wikipedia.org.in
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