CHAPTER-I

OBJECTIVES OF THE STUDY

To study the relevance of capital budgeting in evaluating the project. To study the techniques of capital budgeting for decision-making. To measure the present value of rupee invested. To determine the capital projects those are feasible. To estimate the expenditure involved.

NEED FOR THE STUDY

The project study is undertaken to analyze and understand the Capital Budgeting process in power sector, which gives mean exposure to practical implication of theory knowledge. To know about the companys operations of using various Capital Budgeting techniques. To know how the company gets funds from various resources.

METHODOLOGY
To achieve a fore said objective the following methodology has been adopted. The information for this report has been collected through the primary and secondary sources. PRIMARY SOURCES: It is also called as first handed information the data is collected through the observation in the organization and interviews with officials. By asking questions with the accounts and other persons in the financial department. A part from these some information is collected through the seminars, which were held by APGENCO. SECONDARY SOURCES: These secondary data is existing data which is collected data which is collected by others that is sources are financial journals, annual reports of the APGENCO Ltd., APGENCO website, and other publications of APGENCO.

LIMITATIONS OF THE STUDY

Limited awareness of power generation sector of APGENCO Ltd. Lack of time is another limiting factor the schedule period 6 weeks are not sufficient to make the study independently regarding Capital budgeting in APGENCO Ltd. The busy schedule of the officials in the APGENCO Ltd is another Limiting factor. Due to the busy schedule of officials restricted me to collect the complete information about organization. Availability of confidential financial data is a constraint

CHAPTER - II

CAPITAL BUDGETING
INTRODUCTION The term Capital Budgeting refers to long term planning for proposed capital outlay and their financing. It includes raising long-term funds and their utilization. It may be defined as a firms formal process of acquisition and investment of capital. Capital Budgeting may also be defined as The decision making process by which a firm evaluates the purchase of major fixed assets. It involves firms decision to invest its current funds for addition, disposition, modification and replacement of fixed assets. It deals exclusively with investment proposals, which an essentially long term projects and is concerned with the allocation of firms scarce financial resources among the available market opportunities. Some of the examples of Capital Expenditure are (i) (ii) Cost of acquisition of permanent assets like land and buildings. Cost of addition, expansion, improvement or alteration in the fixed assets. (iii) R&D project cost, etc. DEFINITIONS Capital budgeting is long term planning for making and financing proposed capital outlays. T.HORNGREEN Capital budgeting is concerned with allocation of the firms scarce financial resources among the available market opportunities. The consideration of investment opportunities involves the comparison of the expected future streams of earnings from a project with immediate and subsequent streams of expenditure for it. In any growing concern, capital budgeting is more or less a continuous process and it is carried out by different functional areas of management such as production, marketing, engineering, financial management etc. All the 9

relevant functional departments play a crucial role in the capital budgeting decision process of any organization, yet for the time being, only the financial aspects of capital budgeting decision are considered to discuss. The role of a finance manager in the capital budgeting basically lies in the process of critically and in-depth analysis and evaluation of various alternative proposals and then to select one out of these. As already stated, the basic objectives of financial management is to maximize the wealth of the share holders, therefore the objectives of capital budgeting is to select those long term investment projects that are expected to make maximum contribution to the wealth of the shareholders in the long run. FEATURES OF CAPITAL BUDGETING The important features, which distinguish capital budgeting decisions in other Day-to-day decisions, are Capital budgeting decisions involve the exchange of current funds for the benefits to be achieved in future. The future benefits are expected and are to be realized over a series of years. The funds are invested in non-flexible long-term funds. They have a long terms and significant effect on the profitability of the concern. They involve huge funds. They are irreversible decisions. associated with high degree of risk. IMPORTANCE OF CAPITAL BUDGETING: The importance of capital budgeting can be understood from the fact that an unsound investment decision may prove to be fatal to the very existence of the organization. The importance of capital budgeting arises mainly due to the following: LARGE INVESTMENT Capital budgeting decision, generally involves large investment of funds. But the funds available with the firm are scarce and the demand for 10 They are strategic decisions

funds are exceeds resources. Hence, it is very important for a firm to plan and control its capital expenditure. LONG TERM COMMITMENT OF FUNDS Capital expenditure involves not only large amount of funds but also funds for long-term or an permanent basis. The long-term commitment of funds increases the financial risk involved in the investment decision.

IRREVERSIBLE NATURE The Capital expenditure decisions are of irreversible nature. Once, the decision for acquiring a permanent asset is taken, it becomes very difficult to dispose of these assets without incurring heavy losses. LONG TERMS EFFECT ON PROFITABILITY Capital budgeting decision has a long term and significant effect on the profitability of a concern. Not only the present earnings of the firm are affected by the investments in capital assets but also the future growth and profitability of the firm depends up to the investment decision taken today. Capital budgeting decision has utmost importance to avoid over or under investment in fixed assets. DIFFICULTIES OF INVESTMENT DECISION The long terms investment decisions are difficult to be taken because uncertainties of future and higher degree of risk. NOTIONAL IMPORTANCE Investment decision though taken by individual concern is of national importance because it determines employment, economic activities and economic growth.

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KINDS OF CAPITAL BUDGETING Every capital budgeting decision is a specific decision in the given situation, for a given firm and with given parameters and therefore, an almost infinite number of types or forms of capital budgeting decisions may occur. Even if the same decision being considered by the same firm at two different points of time, the decision considerations may change as a result of change in any of the variables. However, the different types of capital budgeting decisions undertaken from time to time by different firms can be classified on a number of dimensions. Some projects affect other projects the firm is considering and analyzing. At the other extreme, some proposals are prerequisite for other projects. The projects may also be classified as revenue generating projects or cost reducing projects. In general, the projects can be categorized as follows:

1.From the point of view of firm's existence: The capital budgeting decisions may be taken by a newly incorporated firm or by an already existing firm.
a)

New Firm: A newly incorporated firm may be required to take different decisions such as selection of a plant to be installed, capacity utilization at initial stages, to set up or not simultaneously the ancillary unit etc. Existing Firm: A firm which is already existing may also be required to take various decisions from time to time to meet the challenges of competition or changing environment. These decision may be :

b)

(i)

Replacement and Modernization Decision: This is a common type of a

capital budgeting decision. All types of plant and machineries eventually require replacement. If the existing plant is to be replaced because the economic life of the plant is over, then the decisions may be known as a replacement decision. However, if an existing plant is to be replaced because it has become technologically outdated (though the economic life may not be over), the decision may be known as a modernization decision. In case of a replacement decision, the objective is to restore the same or higher capacity, whereas in case of modernization decision, the objective is to increase the efficiency and/or cost reduction. In general, the replacement decision and the modernization decisions are also known as cost 12

reduction decisions.
(ii)

Expansion: Some times, the firm may be interested in increasing the

installed production capacity so as to increase the market share. In such a case, the finance manager is required to evaluate the expansion program in terms of marginal costs and marginal benefits.
(iii)

Diversification: Some times, the firm may be interested to diversify into

new product lines, new markets, production of spare parts etc. In such a case, the finance manager is required to evaluate not only the marginal cost and benefits, but also the effect of diversification on the existing market share and profitability. Both the expansion and diversification decisions may also be known as revenue increasing decisions. From the point of view of decision situation: The capital budgeting decisions may also be classified from the point of view of the decision situation as follows: Independent Project Decision: This is a fundamental decision in Capital Budgeting. It is also called as accept- reject criterion. If the project is accepted the firm does not invest in it. In general all these proposals, which yield a rate of return greater, than ascertain required rate of return on cost of capital, are accepted and the rest are rejected. By applying this criterion all independent project with one another in such a way that the acceptance of one precludes the possibility of acceptance of another. Under the accept-reject decision all independent projects that satisfy the minimum investment criterion should be implemented. Mutually Exclusive Projects Decision: Mutually Exclusive projects are those, which compete with other projects in such a way that the acceptance of one will exclude the acceptance of the other projects. The alternatives are mutually exclusive and only one may be choosen. Suppose a company is intending to buy a new machine, there are three competing brands, each with a different initial investment adopting cost, and the three machines represent mutually exclusive alternatives as only one of these can be selected. Here it may be noted that

13

the mutually exclusive alternatives, as only one of these can be selected. It may be noted that the mutually exclusive project decisions are not independent of the accept reject decisions.

Capital Rationing Decisions: In a situation where the firm has unlimited funds all independent investment proposals yielding return greater than some pre-determined levels are accepted. However this situation does not prevail in most of the business firms in actual practice. They have a fixed capital budget. A large number of investment proposals compete for these limited funds the firm must therefore ration them. The firm allocates funds to projects in a manner that it maximizes long run returns this, capital rationing refers to a situation in which a firm has more acceptance investment than it can finance. It is concerned with the selection of a group of investment proposals acceptable. Under the acceptreject decision capital rationing employees ranking of the acceptable investments projects. The projects can be ranked on the basis of a predetermined criterion such as the rate of return. The projects are ranked in the descending order of the rate of return. PROBLEMS AND DIFFICULTIES IN CAPITAL BUDGETNG: The problems in capital budgeting decisions may be as follows: a) Future uncertainty: Capital budgeting decisions involve long term commitments. However there is lot of uncertainty in the long term. The uncertainty may be with reference to cost of the project, future expected returns, future competition, legal provisions, political situation etc. b) Time Element: The implications of a Capital Budgeting decision are scattered over a long period. The cost and the benefits of a decision may occur at different points of time. The cost of a project is incurred immediately. However, the investment is recovered over a number of years. The future benefits have to be adjusted to make them comparable with the cost. Longer the time period involved, greater would be the uncertainty. 14

c) Difficulty in Quantification of impact: The finance manager may face difficulties in measuring the cost and benefits of projects in quantitative terms. For example, the new products proposed to be launched by a firm may result in increase or decrease in sales of other product proposed to be launched by a firm may result in increase or decrease in sales of other products already being sold by the same firm. It is very difficult to ascertain the extent of impact as the sales of other products may also be influenced by factors other than the launch of the new products. ASSUMPTIONS IN CAPITAL BUDGETING: The capital budgeting decision process is a multi-faced and analytical process. A number of assumptions are required to be made. These assumptions constitute a general set of conditions within which the financial aspects of different proposals are to be evaluated. Some of these assumptions are: 1. Certainty with respect to cost and benefits: It is very difficult to estimate the cost and benefits of a proposal beyond 2-3 years in future. However, for a capital budgeting decision, It is assumed that the estimates of cost and benefits are reasonably accurate and certain. 2. Profit motive: Another assumption is that the capital budgeting decisions are taken with a primary motive of increasing the profit of the firm. No other motive or goal influences the decision of the finance manager. 3. No Capital Rationing: The Capital Budgeting decisions in the present chapter assume that there is no scarcity of capital. It assumes that a proposal will be accepted or rejected on the strength of its merits alone. The proposal will not be considered in combination with other proposals to consider the maximum utilization of available funds. CAPITAL BUDGETING PROCESS Capital budgeting is a complex process as it involves decisions relating to the investment of current funds for the benefit to be achieved in future and

15

the future is always uncertain. However, the following procedure may be adopted in the process of Capital Budgeting.

Identification of investment proposals: The capital budgeting process begins with the identification of investment proposals. The proposal about potential investment opportunities may originate either from top management or from any officer of the organization. The departmental head analysis the various proposals in the light of the corporate strategies and submits the suitable proposals to the capital expenditure planning. Screening Proposals: The expenditure planning committee screens the various proposals received from different departments. The committee views these proposals from various angles to ensure that these are in accordance with the corporate strategies, or selection criterion of the firm and also do not lead departmental imbalances. Evaluation of Various Proposals: The next step in the capital budgeting process is to various proposals. The methods, which may be used for this purpose such as, pay back period method, Rate of return method, N.P.V and I.R.R etc. Fixing Priorities: After evaluating various proposals, the unprofitable uneconomical proposal may be rejected but may not be possible for the firm to invest immediately in all the acceptable proposals due to limitation of funds. Therefore, it essential to rank the projects/proposals after considering urgency, risk and profitability involved there in.

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FINAL APPROVAL AND PREPERATION OF CAPITAL EXPENDITURE BUDGET: Proposals meeting the evaluation and other criteria are finally approved to be included in the capital expenditure budget. The expenditure budget lays down the amount of estimated expenditure to be incurred on fixed assets during the budget period. IMPLEMENTING PROPOSALS: Preparation of a capital expenditure budget and incorporation of a particular proposal in the budget doesnt itself authorize to go ahead with the implementation of the project. A request for authority to spend the amount should be made to the capital expenditure committee, which reviews the profitability of the project in the changed circumstances. Responsibilities should be assigned while implementing the project in order to avoid unnecessary delays and cost overruns. Network techniques like PERT and CPM can be applied to control and monitor the implementation of the projects. PERFORMANCE REVIEW: The last stage in the process of capital budgeting is the evaluation of the performance of the project. The evaluation is made by comparing actual and budgeted expenditures and also by comparing actual anticipated returns. The unfavorable variances, if any should be looked in to and the causes of the same be identified so that corrective action may be taken in future.

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METHODS OR TECHNIQUES OF CAPITAL BUDGETING: There are many methods for evaluating the profitability of investment proposals. The various commonly used methods are TECHNIQUES OF CAPITAL BUDGETING

Traditional Methods methods 1. Pay back 2. Accounting rate of return Traditional methods: (I) Payback period method (P.B.P) (II) Accounting Rate of return method (A.R.R) Time adjusted or discounting techniques: (I) Net Present value method (N.P.V) (II) Internal rate of return method (I.R.R) (III) Profitability index method (P.I)

Time adjusted 1.N.P.V 2.I.R.R 3.P.I

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19

PAY-BACK PERIOD METHOD: The pay back some times called as payout or pay off period method represents the period in which total investment in permanent assets pay back itself. This method is based on the principle that every capital expenditure pays itself back with in a certain period out of the additional earnings generated from the capital assets. Decision rule: A project is accepted if its payback period is less than the period specific decision rule. A project is accepted if its payback period is less than the period specified by the management and vice-versa. Initial Cash Outflow -----------------------------Annual Cash Inflows

Pay Back Period

ADVANTAGES: Simple to understand and easy to calculate. It saves in cost; it requires lesser time and labour as compared to other methods capital budgeting. In this method, as a project with a shorter pay back period is preferred to the one having a longer pay back period, it reduces the loss through obsolescence. Due to its short-term approach, this method is particularly suited to a firm which has shortage of cash or whose liquidity position is not good. DISADVANTAGES:

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 It does not take into account the cash inflows earned after the pay back period and hence the true profitability of the project cannot be correctly assessed. This method ignores the time value of the money and does not consider the magnitude and timing of cash inflows. It does not take into account the cost of capital, which is very important in making sound investment decisions. It is difficult to determine the minimum acceptable pay back period, which is subjective decision. It treats each asset individually in isolation with other assets, which is not feasible in real practice. ACCOUNTING RATE OF RETURN METHOD This method takes into account the earnings from the investment over the whole life. It is known as average rate of return method because under this method the concept of accounting profit (NP after tax and depreciation) is used rather than cash inflows. According to this method, various projects are ranked in order of the rate of earnings or rate of return.

Decision rule The project with higher rate of return is selected and vice versa. as The return on investment method can be used in several ways,

Average Rate of Return Method Under this method average profit after tax and depreciation is calculated and then it is divided by the total capital out lay.

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Average rate of return 100

Average Annual profits (after dep. & tax) = ---------------------------------------------------x Net Investment

ADVANTAGES: It is very simple to understand and easy to calculate. It uses the entire earnings of a project in calculating rate of return and hence gives a true view of profitability. As this method is based upon accounting profit, it can be readily calculated from the financial data.

DISADVANTAGES: It ignores the time value of money. It does not take in to account the cash flows, which are more important than the accounting profits. It ignores the period in which the profits are earned as a 20% rate of return in 2 years is considered to be better than 18% rate if return in 12 years. This method cannot be applied to a situation where investment in project is to be made in parts.

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NET PRESENT VALUE METHOD The NPV method is a modern method of evaluating investment proposals. This method takes in to consideration the time value of money and attempts to calculate the return on investments by introducing time element. The net present values of all inflows and outflows of cash during the entire life of the project is determined separately for each year by discounting these flows with firms cost of capital or predetermined rate. The steps in this method are 1. Determine an appropriate rate of interest known as cut off rate. 2. Compute the present value of cash outflows at the above-determined discount rate. 3. Compute the present value of cash inflows at the predetermined rate. 4. Calculate the NPV of the project by subtracting the present value of cash outflows from present value of cash inflows.

Decision rule Accept the project if the NPV of the project is 0 or +ve that is present value of cash inflows should be equal to or greater than the present value of cash outflows. ADVANTAGES: It recognizes the time value of money and is suitable to apply in a situation with uniform cash outflows and uneven cash inflows.

It takes in to account the earnings over the entire life of the project and gives the true view of the profitability of the investment Takes in to consideration the objective of maximum profitability.

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DISADVANTAGES: More difficult to understand and operate. It may not give good results while comparing projects with unequal investment of funds. It is not easy to determine an appropriate discount rate.

INTERNAL RATE OF RETURN METHOD

The internal rate of return method is also a modern technique of capital budgeting that takes in to account the time value of money. It is also known as time-adjusted rate of return or trial and error yield method. Under this method the cash flows of a project are discounted at a suitable rate by hit and trial method, which equates the net present value so calculated to the amount of the investment. The internal rate of return can be defined as that rate of discount at which the present value of cash inflows is equal to the present value of cash outflows. Decision Rule: Accept the proposal having the higher rate of return and vice versa. If IRR>K, accept project. If IRR<K, reject project. DETERMINANTION OF IRR a) When annual cash flows are equal over the life of the asset. Initial Outlay FACTOR = --------------------------- x 100 Annual Cash Inflow b) When the annual cash flows are unequal over the life of the asset: Pv of cash inflows at lower rate - Pv of cash outflows IRR = LR + ------------------------------------------------------------------------- (hr-lr) Pv of cash inflows at lower rate-Pv of cash inflows at higher rate K = cost of capital.

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The steps are involved here are 1. Prepare the cash flow table using assumed discount rate to discount the net cash flows to the present value. 2. Find out the NPV, & if the NPV is positive, apply higher rate of discount. 3. If the higher discount rate still gives a positive NPV, increase the discount rate further. Until the NPV becomes zero. 4. If the NPV is negative, at a higher rate, NPV lies between these two rates. ADVANTAGES: It takes into account, the time value of money and can be applied in situations with even and even cash flows. It considers the profitability of the projects for its entire economic life. The determination of cost of capital is not a pre-requisite for the use of this method. It provides for uniform ranking of various proposals due to the percentage rate of return. This method is also compatible with the objective of maximum profitability. DISADVANTAGES: It is difficult to understand and operate. The results of NPV and IRR methods may differ when the projects under evaluation differ in their size, life and timings of cash flows. This method is based on the assumption that the earnings are reinvested at the IRR for the remaining life of the project, which is not a justified assumption.

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PROFITABILITY INDEX METHOD OR BENEFIT COST RATIO METHOD It is also a time-adjusted method of evaluating the investment proposals. PI also called benefit cost ratio or desirability factor is the relationship between present value of cash inflows and the present values of cash outflows. Thus

PV of cash inflows Profitability index = -----------------------------------PV of cash outflows

ADVANTAGES: Unlike net present value, the profitability index method is used to rank the projects even when the costs of the projects differ significantly. It recognizes the time value of money and is suitable to applied in a situation with uniform cash outflows and uneven cash inflows. It takes into an account the earnings over the entire life of the project and gives the true view of the profitability of the investment. Takes into consideration the objective of maximum profitability. DISADVANTAGES: More difficult to understand and operate. It may not give good results while comparing projects with Unequal investment funds. It is not easy to determine and appropriate discount rate. It may not give good results while comparing projects with unequal lives as the project having higher NPV but have a longer life span may not be as desirable as a project having some what lesser NPV achieved in a much shorter span of life of the asset

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CHAPTER - III

27

28

HISTORY OF APGENCO
When APSEB came into existence in 1959, APSEB started functioning with the objectives of maintaining the power sector efficiently and economically simultaneously ensuring demand meets the supply. During the last decade inadequate capacity addition and low system frequency operation of less than 48.5 Hz for more than half a decade considerably reduced the power supply reliability. The imbalance of the revenues against the cost of production, no significant reduction in technical losses and energy thefts, high cost purchases from IPP's, other SEB's gradually worsened the financial position of APSEB.

29

HIGH LEVEL COMMITTEE AND ITS RECOMMENDATIONS: Government of Andhra Pradesh realizing the declining tendency of the financial position of APSEB and considering the Government of Indias Liberalized policy fir attracting private investment into power sector set up a high level committee in January 1995 to look into present working of the APSEB and suggest remedies for improvement. The committee after detailed deliberations with all the concerned and critical analysis submitted the report in which it suggested some recommendations. Government of Andhra Pradesh considering the recommendations made by committee had embarked upon the AP ELECTRICITY REFORMS ACT in 1998. As a sequel the APSEB was unbundled into Andhra Pradesh Power Generation Corporation (APGENCO) and Transmission Corporation of Andhra Pradesh Limited (APTRANSCO) on 01.02.99. APTRANSCO was further unbundled w.e.f 01.04.2000 into Transmission Corporation and four Distribution Companies (DISCOMS). Thus APGENCO was incorporated as a company under the provisions of Companies Act, on 29.12.1998. According to the Andhra Pradesh Electricity Reforms Act, 1998, APGENCO commenced its business operations effective from 01.02.1999 and according to the memorandum of APGENCO has to acquire, establish, construct and operate Power-generating stations.

ABOUT APGENCO
Andhra Pradesh Power Generation Corporation Limited is one of the Pivotal organizations of Andhra Pradesh, engaged in the business of power generation. Apart from operation and maintenance of the of the power plants it has undertaken the execution of the ongoing and new power projects scheduled under capacity addition programme and is taking up renovation and modernization works of the old power stations. APGENCO came into existence on 28.12.1998 and commenced operations from 01.02.1999. This was a sequel to Governments reforms in power sectors to unbundle the activities relating to Generation, transmission and 30

Distribution of power. All the generating stations owned by erstwhile APSEB were transferred to the control of APGENCO. The installed capacity of APGENCO AS ON 31.01.2010 IS 6760.9 MW comprising 2962.50 MW Thermal, 3172.5 MW Hydro and 2MW Wind power stations, and contributed about half the total Energy Requirement of Andhra Pradesh. APGENCO is the third largest power generating utility in the country next to NTPC and Maharastra; its installed Hydro Capacity of 3586.4 MW is the highest among the country.

APGENCO has an equity base of Rs.2107 crores with 10804 dedicated employees. The company has an asset base of approximately Rs.17000 crores.

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OUR VISION To be the best power utility in the country and one of the best in the world. OUR MISSION To generate adequate and reliable power most economically, efficiently and Eco-friendly. To spearhead accelerated power development by planning and implementing new power projects. To implement Renovation and Modernization of all existing units and enhance their performance. CORE VALUES: To proactively manage change to the liberalized environment and global trends. To build leadership through professional excellence and quality. To build a team based organization by sharing knowledge and empowering employees. To treat everyone with personal attention, openness, honesty and respect they deserve. To break down all departmental barriers for working together. To have concern for ecology and environment.

LANDMARKS AND ACHIEVEMENTS

APGENCO is the third Largest Power utility in the country in terms of Installed Capacity 6760.9 MW.

Our Hydro Installed Capacity 3586.4 MW is the highest in the country. Thermal plants are consistently winning the Gold and Silver medals for Meritorious Productivity Award.

Availability of thermal plants has been (over a decade) well above the national average.

Recently Srisailam Left Bank Power House, a unique complete under ground powerhouse is successfully commissioned and being operated. This is the first such one in southern region.

AMRP LIFT IRRIGATION Scheme is taken upon and completed well below the stipulated time and budget .In that the pumping station commissioned (18MW) is first such one in India where water is lifted to an height of 100Mts. Srisailam complex is the largest hydro power station with installed capacity 1670 MW in the country. Nagarjuna Sagar Left canal powerhouse is the first hydro station in the country to use SCDCA for operation of the units from control room besides enhancing the Excitation and Governor system with microprocessor controls. Pochampadu Hydro electric scheme is the first hydro power station to use microprocessor controls in the powerhouse. Thermal generation during 2006-07 22067 MU is highest ever achieved by APGENCO. The average PLF of 89.7 % during 2004-05 is the highest ever achieved and highest in the country when compared with the utilities having comparable installed capacity and vintage.

Since 1994-95 VTPS and RTPP are occupying top two positions in terms of PLF rankings, except in the year 1999-00 in which RTPP stood second. VTPS stood FIRST in the country during 1994-95,1995-96,1996-97,1997-98and 2001-02 and RTPP stood first in the country during 1998-99,2000-01,2002-03 and 2003-04. RTPP has been receiving meritorious productivity Award for last six consecutive years and bagged Gold Medal five years in a row since 1998-99. VTPS has been receiving Meritorious Productivity Award for last twenty consecutive years and bagged Gold Medal 9 times in a row since 1994-95. About VTPS STAGE-IV (1x500MW) Orders were placed on M/s BHEL manufactured items and zero date commenced on 5-08-2005. Consultancy contract is awarded on 20-09-2005. For Balance of plant and civil works, Pre-bid meeting with pre-qualified bidders was conducted on 27-01-2006 and 28-01-2006 Receipt of technical and financial bids are due on 28-02-2006. Unit will be commissioned by May 2008. KTPS-V Stage has been receiving Meritorious Productivity Award for last four consecutive years and bagged gold medal four times in a row since 1999-00.

PHYSICAL PERFORMANCE
APGENCO is having six coal based thermal power plants of various capacities at five locations. The performance of thermal power plants is measured by the Plant Load Factors (PLF) achieved during a year. The overall performance of APGENCOs Thermal plants compared to few other well known State Electricity Generating Corporations in India over the last five years.

INSTALLED CAPACITY-THERMAL
NAME OF THERMAL POWER STATION VTPS (210MW) RTPP (210MW) KTPS -ABC (4x60MW&4x120MW) KTPS-V (250MW) RAMAGUNDAM THERMAL STATION TOTAL THERMAL CAPACITY NO.OF UNITS 6 3 8 2 1 20 INSTALLED CAPACITY (MW) 1260 610 720 500 62.5 3152.5

APGENCO IS THE 3rd LARGEST THERMAL GENERATION UTILITY IN THE COUNTRY. Name of the station NTPC MAHAGENCO APGENCO Capacity (MW) 26,350 9,973 6,761

APGENCO IS THE HIGHEST HYDRO GENERATION UTILITY IN THE COUNTRY. NAME OF THE STATION APGENCO KPCL-KARNATAKA NHPC CAPACITY (MW) 3586.4 3376.2 2773.0

OPERATIONAL PERFOMANCE OVERALL PERFOMANCE OF APGENCO

GENARATION (MU) 22067 20745 23360 22455.2 23032 22245 21934 21499 19834 19019 16720 15103 10842 ALLINDIA AVERAGE 76.8 73.6 74.8 72.7 72.1 70.0 68.7 67.5 64.6 64.9 64.5 63.1 60.1

YEAR 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99 1997-98 1996-97 1995-96 1994-95

APGENCO 85.0 79.9 89.7 56 88.9 86.3 85.1 83.2 77.6 82.3 78.1 78.2 70.1

RANKING III I III II I I II III I I I II

PLANT WISE PERFORMANCE

STATION VTPS RTTP KTPS KTPS-V RTS-B NTS 2003-04 10164 3401.6 4225.9 4038.3 471.28 153.94

GENERATION (MU) 2004-05 2005-06 9851.1 9755 3353.8 2371 5364.1 4732 4140.2 3482 496.2 397 154.4 7.4

2006-07 9954 3314 4787 3681 331 -

2003-04 91.84 92.2 68.7 91.95 85.8 58.4

PLF % 2004-05 2005-06 89.2 88.4 91.2 64.4 87.5 75.0 94.5 79.5 90.6 72.5 58.8 46.8

2006-07 90.2 89.5 75.9 84.1 60.4 -

COMPARISONS OF PLANT LOAD FACTOR PLANT WISE COMPARISONS 2004-05

NAME OF THE STATION KOTHAGUDAM V stg DADRI (NTPC) KORBA (NTPC) SIMHADRI (NTPC) UNANCHAR (NTPC) RIHAND (NTPC) RAYALSEEMA (APGENCO) METTUR (TNEB) RAMAGUNDAM B (APGENCO) RAMAGUNDAM (APGFENCO) SINGRAULI (NTPC)

CAPACITY(MW) 500 840 2100 1000 840 1500 420 840 62.5 2600 2000

PLF % 94.5 92.9 92.7 92.7 92.2 91.2 91.2 90.8 90.6 90.3 90.2

STATE WISE COMPARISONS 2004 05

NAME OF THE UTILITY APGENCO GUJARAT SECL NTPC ORISSA PGC RAJASTHAN RVUNL KARNATAKA PCL PUNJAB SEB TAMILNADU SEB NEYVELI LIGNITE CORPORATION MAHARASTRA SEB CHATTISGARH SEB MADHYA PRADESH GPCL SOUTHERN REGION ALL INDIA THERMAL CAPACITY(MW) 2972.5 420.0 20185.0 420.0 2295.0 1470.0 2120.0 2970.0 2490.0 6396.0 1240.0 2272.5 13892.5 67165.9 PLF % 89.7 87.5 87.3 86.0 85.1 83.2 77.5 76.9 76.8 76.6 72.9 72.1 84.1 74.8

PERFORMANCE HIGHLIGHTS OF APGENCO

APGENCO Achieved Top Position Among Power Utilities in All India PLF Rankings. Highest PLF of 89.7 % achieved by APGENCO during 2004-05 since inception. Highest thermal generation is 23360 MU achieved by APGENCO since inception 1965). Highest daily Thermal generation 72.03 MU achieved on 18-112004 since inception. APGENCO has achieved Top Position among power utilization in PLF Rankings for 2004 - 05. Total Installed Capacity of 6760.9 MW is 3rd largest in the country after NTPC in Maharastra. VTPS achieved all time high daily generation 5364 MU and highest PLF of 102.5% on 31-03-2005 since inception (1979). Highest daily APGENCO total generation 109.64 MU achieved on 27-082004 since inception (1955).

ENVIRONMENTAL CONCERNS
ENVIRONMENTAL POLICY (UNWRITTEN) Comply with relevant environmental legislations and regulatory requirements for establishment and operation of the power stations. Commitment ecology, to continual or improvement natural in the environmental sustainable performance to ensure protection or environment, preservation or conservation resources and development. Provide adequate facilities, framework to achieve environmental objectives and targets. EIA AND DEVELOPMENT OF EMP Keeping in view the environmental policy, Environmental Impact Assessments are carried out for individual stations and Environmental Management Plans are developed for implementation during construction and operation phases. POLLUTION CONTROL SYSTEMS High efficiency Electro-static Precipitators (ESPs) is installed to control Suspended Particulate matter (SPM) in flue gas. All new plants are designed for SPM level of 100mg/Nm3.Old units are upgraded or under up gradation for50/115mg/Nm3 against APPCB limit of 115mg/Nm3. Latest micro processor based EPIC-II controllers are installed for improvement of collection efficiency and reduction of power consumption online flue gas dust monitoring systems are installed at VTPS, RTPP and KTPS Stage-V. Coal Plant and other plant effluent are treated in the Setting Tanks. Plant and colony Sewage is treated in the septic tanks. Oxidation pond is provided at RTPP for better treatment of sewage. At other stations like VTPS Activated sludge treatment with diffused Aeration is under contemplation. Effective De-cantation systems are provided in the ash ponds to control suspend solids. Suspended solids in the ash pond outlet effluent are below 50ppm against standard of 100 ppm.

 Re-circulation and Re-use system is provided at RTPP and at other stations such systems are under contemplation.

ASH UTILISATION The annual generation of fly ash from Thermal Power Plants of APGENCO is presently around 6.8 million tons/annum. APGENCO has been implementing following measures. Dry fly ash and pond ash are issued free of cost to all consumers. Brick plants are set up at VTPS, RTPP and KTPS. Research and field tests are underway through Acharya NG Ranga Agricultural University (ANGRAU) and Department of Agriculture, GOAP to establish benefits with fly ash use for agriculture for all crops in the different agro-climate zones of Andhra Pradesh. Feasibility of ash stowing to mines is under study. Ash utilization has witnessed improvement year by year. IS0 14001 CERTIFICATION APGENCO is in the process of being certified for ISO 14001 Environmental Management Systems in a phased manner at its thermal power stations such as Vijaywada Thermal Power Station, Rayalaseema Thermal Power Project, Kothagudem Thermal Power Station Stage-V and Kothagudem Thermal power Station. ISO 14001 Environmental Management System (EMS) Certification process has started at Rayalseema Thermal Power Station, Kothagudem Thermal Power Station and Vijayawada Thermal Power Station and is expected to be completed by December 2007 at Kothagudem (O&M) thermal power station ISO 140001 certification work will be taken up in August07.

GOALS ARE TO BE ACHIEVED To achieve emission standards at all thermal power stations by undertaking suitable up gradation/modifications in the system. To achieve effluents standards at all thermal power stations by adopting suitable treatment systems. To ensure zero discharge of effluent from the plants by installing re-cycling are re-use systems at major power plants i.e., VTPS and KTPS. To develop ISO 14001 Environmental Management Systems for major thermal power stations of APGENCO. To achieve ash utilizations as per action plans submitted to the MOE&F notification dated 14.09.1999. To strengthen the Environmental Management cells, its performance in monitoring and auditing, providing training on the relevant aspects.

BOARD OF DIRECTORS :
NAME SUTIRTHA BHATTACHARYA I.A.S DESIGNATION CHAIRMAN

VIJAYANAND I.A.S

MANAGING DIRECTOR

G.ADISHESHU

DIRECTOR (HYDEL)

U.G.KRISHNA MURTHY

DIRECTOR (TECHNICAL)

D.PRABHAKAR RAO

DIRECTOR (FINANCE)

C. RADHA KRISHNA G. VAMAN RAO

DIRECTOR (PROJECTS)
DIRECTOR(HUMAN RESOURCES)

OUR POWER PLANTS

THERMAL :

Vijayawada Thermal Power Station :

Turbine generator

pump house

stacker

boiler

Rayalaseema Thermal Power Plant :

Water source

switchyard

community hall

Kothagudem Thermal Power Station : Thermal Power Station:

Ramagundam

Hydel :
Nagarjuna Sagar Hydro Electric Scheme

Dam & power house

left canal power house

right canal power house

Srisailam Hydro Electric Scheme : Electric Scheme:

Lower Sileru Hydro

house

Donkarayi dam

donkarayi power

Upper sileru HPS stage-I&II and VTPS have won outstanding performance awards for the year 2005-06 Thermal stations VTPS and RTPP have won outstanding performance awards for the year 2006-07

2007-08
Rayalaseema Stage II (2x210 MW) has been commissioned. First 2 Units of Priyadarshini Jurala HEP (39 MW each) have been commissioned. APGENCO has achieved highest generation of 33289 MU since inception during 2007-08. Thermal power stations have achieved highest generation of 23685.8 MU during 2007-08 surpassing the previous high of 23360 MU achieved during 2004-05. Hydro power stations generated 9587.5 MU during 2007-08, highest after 1994-95. APGENCO power stations have recorded the highest daily generation of 132.59 MU on 26.09.2008 since inception. APGENCO has earned a net profit of Rs.198 Crores during 2007-08. During 2006-07 APGENCO has turned in to a Profit making Company by wiping out the accumulated losses for the last 3 years.

CHAPTER - IV

DATA ANALYSIS INVESTMENT EVALUATION CRITERIA

Three steps are involved in the evaluation of an investment: Estimation of Cash Flows. Estimation of the required rate of return. Application of a decision rule for making the choice.

The investment decision rules may be referred to as capital budgeting techniques or investment criteria. A sound appraisal technique should be used to measure the economic worth of the investment project. The essential property of a sound technique is that it should maximize the shareholders wealth. A number of capital budgeting techniques are used in practice. They may be grouped as follows: Pay back period Average rate of return (ARR) Net Present Value (NPV) Internal rate of return (IRR) Profitability Index

All these methods of capital budgeting techniques are explained in detail below: PAY BACK PERIOD: The pay back period is one of the most popular and widely recognized traditional methods of evaluating investment proposals. It is defined as the number of years required in a project. formulae: Initial Investment Pay Back period = ----------------------------------Annual Cash Flows If the project generates constant annual cash inflows, the payback period can be computed by the following

In case of unequal cash inflows, the pay back period can be computed by calculating the cumulative cash inflow and checking weather the values are recovered to the original outlay and taking the remaining amount and apply the formulae i.e., Required CFAT PBP = base year + ---------------------------Next year CFAT ACCEPTANCE RULE: Many firms use the payback period as an accept for reject criterion as well as a method of ranking projects. If the payback period calculated for a project is less than the maximum or standard pay back period set by management, it would be accepted, if not, it would be rejected. As a ranking method, it gives highest ranking to the project, which has the shortest payback period and lowest ranking to the project, which has highest payback period.

STATEMENT SHOWING CALCULATION OF PAY BACK PERIOD

YEARS

PAT

DEP

CFAT

Cumulative cash flow

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 TOTAL

33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 844.75

87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 981.05

120.99 120.99 120.99 120.99 120.99 120.99 120.99 120.99 120.99 120.99 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 1825.60

120.99 241.98 362.97 483.96 604.95 725.94 846.93 967.92 1088.91 1209.90 1250.96 1292.02 1333.08 1374.14 1415.20 1456.26 1497.32 1538.38 1579.44 1620.50 1661.56 1702.62 1743.68 1784.74 1825.80

Base Year = 9th Year Required CFAT = 33.79 Next Year CFAT = 1209.90 33.79 Pay back Period = 9 + ------------ = 9+ 0.0279 = 9.027 years 1209.90 INTERPRETATION From the point of Pay Back Period the project can be accepted, because to get the initial investment of Rs.1090 crores, it is taking a time of 9.027 years.

AVERAGE RATE OF RETURN: The Average Rate of Return (ARR) is also known as Accounting Rate of Return using accounting information, as revealed by financial statements, to measure the profitability of an investment. The accounting rate of return is found out by dividing the average after tax profit by the average investment. The average investment would be equal to half of the original investment, if it is depreciated constantly. The Accounting rate of return can be calculated by the following formula i.e., Annual Average Profit after Tax A.R.R. = ---------------------------------------------- X 100 Annual Average Investment STATEMENT SHOWING CALCULATION OF ANNUAL RATE OF RETURN CASH OUT FLOW YEARS NOTIONAL NOTIONAL TOTAL DEBT EQUITY 1 2 872 784.80 (872.087.20) 697.60 (784.8087.20) 610.40 (697.6087.20) 523.20 (610.4087.20) 436 (523.2087.20) 348.80 (43687.20) 261.60 (348.8087.20) 174.40 (261.6087.20) 218 218 218 218 218 218 218 218 218 915.60 828.40 741.20 654 566.80 479.60 392.40 74.8524 65.49592 56.13936 46.7828 37.42624 28.06968 18.71312 33.79 33.79 33.79 33.79 33.79 33.79 33.79 108.6424 99.2859 89.9293 80.5728 71.21624 61.85968 52.5031 1090 1002.80 CASH INFLOW INT ON R.O.E NOTIONAL RUPEE DEBT 93.5656 33.79 84.20904 33.79 TOTAL

127.3556 117.9990

3 4 5 6 7 8 9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 TOTAL

87.20 (174.4087.20) 0 (87.2087.20) -7.273 (0-7.27) -14.54 (-7.277.27) -21.81 (-14.547.27) -29.08 (-21.817.27) -36.35 (-29.087.27) -43.62 (-36.357.27) -50.89 (-43.627.27) -58.16 (-50.897.27) -65.43 (-58.167.27) -72.70 (-65.437.27) -79.97 (-72.77.27) -87.24 (-79.977.27) -94.51 (-87.247.27) -101.78 (-94.517.27)

218 218 218 218 218 218 218 218 218 218 218 218 218 218 218 218

305.20 218 210.73 203.46 196.19 188.92 181.65 174.38 167.11 159.84 152.57 145.30 138.03 130.76 123.49 116.22 9482.65

9.35656 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79

43.14656 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 1359.3608

Average NPAT =1359.3608/25 = 54.374432 Average Investment = 9482.65 / 25 54..374432 ARR = ---------------X 100 = 14.33% 379.306 INTERPRETATION: From the point of ARR method project should be accepted, as its = 379.306

ARR is less than the required rate of return (Ko).

NET PRESENT VALUE

The Net present value (NPV) method is the classic economic method of evaluating the investment proposals. It is one of the discounted cash flow techniques explicitly recognizing the time value of money. It correctly postulates that cash flows arising at different time periods differ in value and the comparable only when their equivalents present values are found out. The following steps are involved in the calculation of NPV. Cash flows of the investment project should be forecasted based on realistic assumptions. Appropriate discount rate should be identified to discount the forecasted cash flow. The appropriate discount rate is the firms opportunity cost capital, which is equal to the required rate of return, expected by investors on investments of equivalent risk. Present value of cash flows should be calculated using opportunity cast of capital as the discount rate. Net present value should be found out by subtracting present value of cash outflow present value of cash inflow. Acceptance Rule: The project should be accepted if NPV is positive it should be clear that the acceptance rule using NPV method is to accept the investment project if its net present value is negative (NPV CASH OUTFLOW). The positive net present value will result only if the project generates cash inflows at rate higher than the opportunity cost of capital. A project may be accepted in NPV = 0. Thus, the NPV acceptance rules are: Accept if NPV >0 Reject if NPV <0 Ill-defined if NPV = 0.

STATEMENT SHOWING CALCULATIONS OF NET PRESENT VALUE

CASH OUT FLOW 218.00 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 1199.05 P.V OF CASH OUT FLOW 218.00 77.869 69.498 62.086 55.459 49.442 44.210 39.414 35.228 31.479 28.078 2.086 1.868 1.664 1.490 1.330 1.185 1.061 0.945 0.8433 0.7560 0.6761 0.6034 0.537 0.479 0.428 726.714 9

YEARS 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Total

PAT

DEP

CFAT

NPV @12% 1.000 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.287 0.257 0.229 0.205 0.183 0.163 0.146 0.130 0.116 0.104 0.093 0.083 0.074 0.066 0.059

P.V CFAT

33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 844.75

87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 981.05

120.99 120.99 120.99 120.99 120.99 120.99 120.99 120.99 120.99 120.99 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 1825.80

108.04 96.429 86.144 76.949 68.601 61.342 54.687 48.879 43.677 38.958 11.784 10.552 9.402 8.417 7.513 6.692 5.994 5.337 4.762 4.270 3.818 3.407 3.038 2.709 2.422

7. Present value of cash inflow = 773.827 Present value of cash outflow = 726.7149 Net Present Value = 773.827-726.7149 =47.112 crores. Interpretation: As NPV is positive, the project is accepted.

PROFITABILITY INDEX It is also called as Benefit Cost Ratio. It is also a time-adjusted method of evaluating the investing proposals. It is the relationship between present value of cash inflows and the present value of cash outflows. Thus

STATEMENT SHOWING CALCULATION OF PROFITABILITY INDEX

CASH OUT FLOW 218.00 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Total 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 844.75 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 981.05 120.99 120.99 120.99 120.99 120.99 120.99 120.99 120.99 120.99 120.99 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 1825.80 1.000 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.287 0.257 0.229 0.205 0.183 0.163 0.146 0.130 0.116 0.104 0.093 0.083 0.074 0.066 0.059 108.044 96.429 86.144 76.949 68.601 61.342 54.687 48.879 43.677 38.958 11.784 10.552 9.402 8.417 7.513 6.692 5.994 5.337 4.762 4.270 3.818 3.407 3.038 2.709 2.422 773.827 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 P.V OF CASH OUT FLOW 218.00 77.869 69.498 62.086 55.459 49.442 44.210 39.414 35.228 31.479 28.078 2.086 1.868 1.664 1.490 1.330 1.185 1.061 0.945 0.8433 0.7560 0.6761 0.6034 0.537 0.479 0.428 726.714 9

YEARS

PAT

DEP

CFAT

NPV @12%

P.V CFAT

PV of cash inflows Profitability Index = -------------------------PV of cash out flows From the above table calculated values are Present value of cash inflow = 773.827 Present value of cash outflow = 726.7149 773.827 = ------------------726.7149 = NET PROFITABILITY INDEX = 1.064 NPV . Initial cash out lay

Profitability Index

47.112 NET PROFITABILITY INDEX = 726.7149 = 0.064

Interpretation:
As the profitability Index is >1, the project should be accepted

INTERNAL RATE OF RETURN

The internal rate of return (IRR) method is another discounted cash flow technique, which makes account of the magnitude and timing of cash flows. Others terms used to describe the IRR Method are yield on investment, marginal efficiency of capital, rate of return over cost, time adjusted rate of internal return and so on. The concept of internal rate of return is quite simple to understand in the case of one-period projects. The IRR is calculated by interpolating the two rates with the help of the following formula:

Pv of cash inflows at lower rate - Pv of cash outflows IRR = LR+ ------------------------------------------------------------------------ (hr-lr) Pv of cash inflows at lower rate-Pv of cash inflows at higher rate WHERE, Lr = Hr= Rate of interest that is lower of the two rates at which PV of Cash inflows have been Calculated. Rate of interest that is higher of the two rates at which PV of Cash inflows have been Calculated.

ACCEPTANCE RULE The accept project rule, using the IRR method, is to accept the project if its internal rate of return is higher than the opportunity cost of capital (r>k) note that k is also known as the required rate of return or cut-off rate. The project shall be rejected if its internal rate of return is lower than the opportunity cost of capital. Thus the IRR acceptance rules are: Accept if r>k Reject if r<k May accept if r=k

STATEMENT SHOWING CALCULATIONS OF

INTERNAL RATE OF RETURN Calculation of IRR @ 13% & 14 %

YEARS 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Total 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 33.79 844.75 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 87.20 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 7.27 120.99 120.99 120.99 120.99 120.99 120.99 120.99 120.99 120.99 120.99 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 41.06 PAT DEP CFAT PV @13% 1.000 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295 0.261 0.231 0.204 0.181 0.160 0.141 0.125 0.111 0.098 0.087 0.077 0.068 0.060 0.053 0.047 P.V CFAT 107.07 6 94.735 83.846 74.166 65.697 58.075 51.420 45.492 40.289 35.692 10.716 9.484 8.376 7.431 6.569 5.789 5.1325 4.557 4.023 3.572 3.161 2.792 2.463 2.176 1.929 734.65 85 Pv @14% 0.877 P.V OF CFAT

106.10 8 0.769 93.041 0.675 81.668 0.592 71.626 0.519 62.793 0.456 55.171 0.400 48.396 0.351 42.467 0.308 37.264 0.270 32.667 0.237 9.731 0.208 8.540 0.182 7.472 0.160 6.5696 0.140 5.7484 0.123 5.0503 0.108 4.4344 0.095 3.9007 0.083 3.40798 0.073 2.9973 0.064 2.6278 0.056 2.2993 0.049 2.0119 0.043 1.7655 0.038 1.5602

981.05 1825.80

699.317 38

NET PRESENT VALUE of cash flow of LOWER RATE (LR) = 734.6585 NET PRESENT VALUE of cash flow of HIGHER RATE (HR) =699.31738

Therefore, IRR = PV @ L R - C O F LR + ------------------------------------------ x Rate Difference PV @ L R - PV @ H R = 734.6585-726.7149 13% + ------------------------------ x 1 734.6585-699.31738 7.9436 13% + ------------- x 1= 13.224% 35.3412

Interpretation: Therefore, IRR lies at 13.224%. It is a point where outflow = inflow And IRR>K, Therefore it is accepted.

VTPS STAGE-IV Model Tariff at PLF of 80.00 Installed Capacity Unit-1 210 MW

Rupee Debt Capital Cost for Tariff purpose

Cost/MW

Rs.1090.00Cr Rs.1090.00 Cr
Rs. 5.19 Cr

Repayment of loan 1 (10,0 years) Repayment mode Notional INT. on Notional Debt O&M and Insurance charges P.A. Interest on working capital Discount rate (Inflation rate for Levellisation) Depreciation (up to 90% of CC for TP) Plant Life Spares after 1st 5years (WCI)
Notional Debt

40quarters quarterly 10.73% 13.16lakhs/MW 12.50% 12.00% 10% of loan amt 25 years 1% of Capital Cost
872.00Rs. Cr

Notional Equity ROE on Notional Equity Min. PLF Eligible for Incentive Incentive above 80%PLF O & M Annual Escalation Fuel Escalation Spares Escalation

218.00Rs. Cr. 15.5% 80% 25paise/kwh 4% 0% 6%

STATION PARAMETERS Station Heat Rate Auxiliary Consumption Specific Oil Consumption Cost of Coal Cost of Oil Gcv of coal Gcv of oil 1880 Rs/Mt 29000Rs/kl 3100 Kcal/kg 10000 kcal/lit

STABILIZATION 2500kcal/kwh 9.00% 2.0 ml/kwh

PLF Working Capital allowed at Availability

80.00 % 80.00 % PLF 80.00 % Levellised 1.59Rs/Kwh 1.72 Rs/Kwh 3.31 Rs/Kwh First year 2.19 Rs/Kwh 1.72 Rs/Kwh 3.91 Rs/Kwh

Fixed Cost Variable Cost Total Tariff

CHAPTER - V

FINDINGS
The power sector is a service sector which falls in basic infrastructure sector the motto of investment is to serve the society rather than profit making hence the social cost benefit analysis method to be followed. The internal rate of return of RTPP is considerably high.. The profitability index is to meet company objectives. As discussed in earlier chapter APGENCO follows, systems and procedures as The net present value of RTPP is satisfactory. per the Andhra Pradesh State Electricity Act, accordingly project initiative is taken up. While preparing project financing APGENCO considers Social benefit of the state. APGENCO APDISCOMS. generates the power based on requirement of

The projects life is expected to be 25 years; due to this the gestation period is very high. The entire project is financed by the power financial institutions like (REC & other banks). The major portion of finance is done through secured loans. The unit cost and other expenditures are eligible to claim from the potential buyer as approved by the Regulatory Commission.

SUGGESTIONS

high.

The subscribed cost in future should be reduced. The risk is associated with the project, since the generation period is Government of AP should provide notional debt equity. Better technical management will reduce the auxiliary consumption.

CONCLUSIONS

of the state.

While preparing project financing APGENCO considers Social benefit The projects life is expected to be 25 years; due to this the gestation period is very high. The major portion of finance is done through secured loans. Due to some restrictions the secured data as not presented by officials but the information is given by them is satisfactory.

CHAPTER - VI

BIBLIOGRAPHY
FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT FINANCIAL MANAGEMENT THEORY &PRACTICE FINANCIAL MANAGEMENT WEBSITE : : : : : I.M PANDAY M.Y.KHAN&P.K.JAIN PRASANNA CHANDRA SHARMA & SASHI K. GUPTA

www.apgenco.com