STUDY OF CUSTOMER SATISFACTION LEVEL OF

TELECOM INDUSTRY
(WITH SPECIAL ALLUSION TO IDEA CELLULAR LIMITED)

A TRAINING REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENT FOR THE AWARD OF THE DEGREE

MASTER OF BUSINESS ADMINISTRATION

SUBMITTED BY

MISHAL SINGH
MBA/15047/13

DEPARTMENT OF MANAGEMENT
BIRLA INSTITUTE OF TECHNOLOGY, MESRA, RANCHI
PATNA CAMPUS
2013 - 2015

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 DECLARATION CERTIFICATE

This is to certify that the work presented in the training report entitled “Study of Customer
Satisfaction Level of Telecom Industry With Special Allusion To Idea Cellular Limited” in
partial fulfilment of the requirement for the award of Degree of Master of Business
Administration of Birla Institute of Technology Mesra, Ranchi is an authentic work carried out
under my supervision and guidance.

To the best of my knowledge, the content of this training report does not form a basis for the
award of any previous Degree to anyone else.

Date: Dr. Julee Banerjee

Department of Management
BIRLA INSTITUTE OF TECHNOLOGY
PATNA CAMPUS

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 ACKNOWLEDGEMENT

Every project big or small is successful largely due to the effort of a number of wonderful people
who have always given their valuable advice or lent a helping hand. I sincerely appreciate the
inspiration, support and guidance of all those people who have been instrumental in making this
project a success.

I express my gratitude to my Project Guide Dr. Julee Banarjee, Assistant Professor, DMS, BIT,
Mesra (Patna Campus) who assisted me in compiling the project.

I would also like to place a deep sense of gratitude to my family members and friends who have
always been a constant source of inspiration during the preparation of this project work.

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 CERTIFICATE OF APPROVAL

The foregoing training report entitled “Study of Customer Satisfaction Level”, is hereby
approved as a creditable study of research topic and has been presented in satisfactory manner to
warrant its acceptance as prerequisite to the degree for which it has been submitted.
It is understood that by this approval, the undersigned do not necessarily endorse any conclusion
drawn or opinion expressed therein, but approve the training report for the purpose for which it is
submitted.

(Internal Examiner) (External Examiner)

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 TABLE OF CONTENT

Chapter No. Title Page No.

INTRODUCTION 6

CUSTOMER SATISFACTION MEASUREMENT 9

CHAPTER -1

METHODLOGIES 11

BENEFITS AND CHALLENGES 13

RESEARCH METHODLOGY 14

METHODS OF RESEARCH 15
CHAPTER -2
NEEDS OF THE STUDY 16

OBJECTIVES OF THE STUDY 17

LIMITATIONS OF THE STUDY 17

INDUSTRY PROFILE 18
CHAPTER -3
COMPANY PROFILE 19

PRODUCT PROFILE 20

CHAPTER -4
DATA ANALYSIS & INTERPRETATION 32

FINDINGS & SUGEESTIONS 49

CHAPTER -5
BIBLOGRAPHY 51

QUESTIONNAIRE 52

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 CHAPTER – 1
Introduction

1.1 Introduction to the company

INDIAN OIL CORPORATION LTD.

 Indian Oil Corporation Ltd. (Indian Oil) was formed in 1964 through the merger of Indian Oil
Company Ltd. (Estd. 1959) and Indian Refineries Ltd. (Estd. 1958).
 At Indian Oil, corporate social responsibility (CSR) has been the cornerstone of success right
from inception in the year 1964. The Corporation’s objectives in this key performance area are
enshrined in its Mission statement: "…to help enrich the quality of life of the community and
preserve ecological balance and heritage through a strong environment conscience”
 .From a fledgling company with a net worth of just Rs. 45.18 crore and sales of 1.38 million
tons valued at Rs. 78 crore in the year 1965, Indian Oil has since grown over 3000 times.
 Indian Oil Corporation Ltd. (Indian Oil) is India's largest commercial enterprise, with a sales
turnover of Rs. 2,47,479 crore (US $ 61.70 billion) and profits of Rs. 6,963 crore (US $ 1.74
billion) for the year 2007-08.
 Indian Oil is also the highest ranked Indian company in the prestigious Fortune 'Global 500'
listing, having moved up 19 places to the 116th position in 2008. It is also the 18th largest
petroleum company in the world.

 Indian Oil has ambitious investment plans of Rs. 43,250 crore in the next five years. By 2011-
12, the Indian Oil Group, with 80 MMTPA refining capacity in its fold, would be playing a key
role in realizing India’s bid to emerge as an export-oriented hub for finished products.

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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.

VISION
A major, diversified, transnational, integrated energy company, with national leadership and a
strong environment conscience, playing a national role in oil security and public distribution.

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 VALUES

Care – Stands for Innovation –Stands for

 Concern  Creativity
 Empathy  Ability to learn
 Understanding  Flexibility
 Cooperation  Change
 Empowerment

Passion - Stands for Trust - Stands for

 Commitment  Delivered Promises
 Dedication  Reliability
 Pride  Dependability
 Inspiration  Integrity
 Ownership  Truthfulness
 Zeal & Zest  Transparency

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VARIOUS DIVISIONS OF IOCL

REFINERIES DIVISION
Indian Oil controls 10 of India’s 18 refineries – at Digboi, Guwahati, Barauni, Koyali, Haldia,
Mathura, Panipat, Chennai, Narimanam and Bongaigaon – with a current combined rated
capacity of 54.20 million metric tones per annum (MMTPA) * (one million barrels per day).
Indian Oil registered a record throughput of 36.63 millions tones during the year 2004-05 with a
capacity utility of 88.6%. Indian Oil accounts for 42% of India’s total refining capacity. Overall
Energy consumption of Indian Oil refineries was lowest at 109 MBTU/BBL/NRGF against
earlier best of 111, achieved in 2003-04. Gross Refining Margin (GRM) rose by almost one
dollar per barrel during the year 2004-05. It is expected to be the highest at US$ 6.25/bbl for the
year 2004-05 as against $5.30/bbl in 2003-04. All refinery units are accredited with ISO 9002
and ISO 14001 certifications.

DIGBOI REFINERY (UPPER ASSAM)

The Digboi Refinery in North Eastern India is India’s oldest refinery and was commissioned in
1901. Originally a part of Assam Oil Company, it became part of Indian Oil in 1981, its original
refining capacity has been 0.5 MMTPA since 1901. Modernization project of this refinery has
been completed and the refinery now has an increased capacity of 0.65 MMTPA. The Digboi
refinery produces distillates, heavy ends and excellent quality wax from indigenous crude oil
produced at the Assam Oil fields. Petroleum products are supplied mainly to northeastern India
primarily through road and by rail wagons. A new Delayed Coking Unit of 1, 70,000 TPA
capacity was commissioned in 1999. A new solvent dewaxing unit for maximizing production
of microcrystalline wax was installed and commissioned in 2003. The refinery has also installed
Hydrotreater to improve the quality of diesel.

GUWAHATI REFINERY
The Guwahati Refinery in North East India – the first Public Sector refinery of the country-was
commissioned in 1962 with a capacity of 0.75 MMTPA which was subsequently increased to 1.0
MMTPA through debottlenecking projects. The refinery processing only indigenous crude oil

9
from the Assam oil fields. It supplies petroleum products to North-Eastern India and surplus
products onwards to Siliguri in West Bengal in 2003. Hydrotreater unit for improving the
quality of diesel has been commissioned in 2002. In 2003, the refinery installed an IndMax
Unit a novel technology developed by Indian oil’s R & D center for upgrading heavy ends into
LPG, motor spirit and diesel oil.

BARAUNI REFINERY
Further to its current capacity of 6.0 MMTPA through low cost revamping and debottlenecking.
Matching secondary processing facility such as RFCC (Reside Fluidized Catalytic Cracker) and
hydrotreater facilities for diesel quality improvement have been added. With the commissioning
of the 6.0 MMTPA Haldia-Barauni crude oil pipeline, the refinery now received imported crude
for processing. A CRU (Catalytic Reformer Unit) was also added to the refinery in 1997 for
production of unleaded motor spirit. Projects are also planned for meeting future fuel quality
requirements. Barauni refinery supplies distillate products beside eastern India to northern India
through a product pipeline to Kanpur in Uttar Pradesh.
GUJARAT REFINERY
The Gujarat Refinery at Koyali in Gujarat in Western India is IndianOil’s largest refinery. The
refinery was commissioned in 1965. Its facilities include five atmospheric crude distillation
units. The major units include CRU, FCCU and the first Hydro cracking unit of the
country.Through a product pipeline to Ahmedabad and a recently commissioned product pipeline
connecting to BKPL product pipeline and also by rail wagons/trucks, the refinery primarily
serves the demand for petroleum products in Western and Northern India.When commissioned,
the Gujarat refinery had a design capacity of 3.0 MMTPA. It was increased to 4.3 MMTPA by
the revamping of three distillation Units. In 1978, its processing capacity was further increased
to 7.3 MMTPA by the addition of a crude distillation unit. Subsequently the crude capacity was
increased to 9.5 MMTPA by 1990 and then by 12.5 MMTPA in 1999. Since it has been
increased to its present capacity of 13.70 MMTPA by low cost debottlenecking.

HALDIA REFINERY
Haldia Refinery, the fourth in the chain of seven operating refineries of IndianOil, was
commissioned in January 1975. It is situated 136 km downstream of Kolkata in the district of

10
East Midnapur, West Bengal, near the confluence of river Hoogly and river Haldi. The refinery
had an original crude oil processing capacity of 2.5 MMTPA. Petroleum products from this
refinery are supplied to eastern India through two product pipelines as well as through Barges,
tank wagons and tank trucks.Products like MS, HSD and Bitumen are exported from this
refinery.Refinery was increased to 2.75 MMTPA through de-bottlenecking in 1989-90. Refining
capacity was further increased to 3.75 MMTPA in 1997 with the installation/commissioning of
second Crude distillation unit of 1.0 MMTPA capacity.Diesel Hydro Desulphurisation (DHDS)
unit was commissioned in 1999, for production of low sulphur content (0.25%wt.) High Speed
Diesel. With augmentation of this unit, refinery is producing BS-II and Euro-III equivalent HSD
at present.

MATHURA REFINERY
The Mathura Refinery was commissioned in 1982 with an original capacity of 6.0 MMTPA.
The capacity was increased to 7.5 MMTPA by debottlenecking and revamping. With its fluid
catalytic cracking units, the refinery mainly produces middle distillates and supplies them to
Northern India through a product pipeline to Jalandhar, Punjab via Delhi. A hydro cracker for
increasing middle distillates was also completed in 2000. The present capacity of the refinery is
8 MMTPA. In order to meet future fuel requirements, facilities for improvement in quality of
MS & HSD are under installation and planned to be completed by 2005.

PANIPAT REFINERY
Indian Oil’s seventh refinery, commissioned in 1998, is located at Panipat, 125 kms away from
Delhi, the capital of India, in the state of Haryana in Northern India. The main units are OHCU
(Once-through-hydro cracker), RFCC, CCRU (Continuous Catalytic Reformer unit) besides
other secondary treatment units. This 6 MMTPA refinery caters to the high demand centers of
Northern India. The product to increase the capacity of Panipat refinery to 15 MMTPA is already
under implementation, which also takes into account future fuel quality requirements for 2005.
The expansion project is expected to be completed in 2005.

1.1.1 Company History

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The Indian Oil Corporation Ltd. operates as the largest company in India in terms of turnover
and is the only Indian company to rank 88 th in the Fortune "Global 500" listing. The oil concern
is administratively controlled by India's Ministry of Petroleum and Natural Gas, a government
entity that owns just over 90 percent of the firm. Since 1959, this refining, marketing, and
international trading company served the Indian state with the important task of reducing India's
dependence on foreign oil and thus conserving valuable foreign exchange. That changed in April
2002, however, when the Indian government deregulated its petroleum industry and ended Indian
Oil's monopoly on crude oil imports. The firm owns and operates seven of the 17 refineries in
India, controlling nearly 40 percent of the country's refining capacity.

1958

 Indian Refineries Ltd. formed in August with Mr Feroze Gandhi as the Chairman.

1959

 Indian Oil Company Ltd. established on 30th June 1959 with Mr S. Nijalingappa as the
Chairman.

1960

 Agreement for supply of Kerosene and Diesel signed with the then USSR.
 MV Uzhgorod carrying the first parcel of 11,390 tonnes of Diesel for IndianOil docked
at Pir Pau Jetty in Mumbai on 17th August 1960.

1962

 Guwahati Refinery inaugurated by Pt. Jawaharlal Nehru, Hon’ble Prime Minister of India.
 Construction of Barauni Refinery commenced.

1963

 Foundation laid for Gujarat Refinery

 Indian Oil Blending Ltd. (a 50:50 Joint Venture with Mobil) formed.

1964

 Indian Refineries Ltd. merged with Indian Oil Company with effect from 1st September,
1964, and Indian Oil Company renamed as Indian Oil Corporation Ltd.
 Barauni Refinery commissioned.

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 The first petroleum product pipeline from Guwahati to Siliguricommissioned.

1965

 Gujarat Refinery inaugurated by HE Dr.S.Radhakrishnan, President of India.

 Barauni-Kanpur product pipeline and Koyali- Ahmedabad product pipeline commissioned.
 IndianOilPeople maintained the vital supply of Petroleum products to Defence Services
during Indo-Pak war.

1967

 HaldiaBarauni product pipeline commissioned.Bitumen and marine bunkering businesses

commenced.

1968

 Techno-economic studies for Haldia-Calcutta, Bombay-Pune and Bombay-Manmad

Pipelines submitted to Government.

1969

 Marketing of Madras Refineries Ltd. products commences.

1970

 Acquired 60% majority shares of IBP Co. Ltd. The same was offloaded in favour of the
President of India in 1972.

1971

 Dealership/reservation extended to war widows, disabled Defence personnel, freedom

fighters, etc. for the first time after the Indo-Pak war.

1972

 R&D Centre established at Faridabad.

 SERVO, the first indigenous lubricant, launched.

1973

 Foundation-stone of Mathura Refinery laid by Mrs. Indira Gandhi, Hon’ble Prime Minister
of India.

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1974

 Indian Oil Blending Ltd. became the wholly-owned subsidiary.

 Marketing Division attained a new watershed with market participation of 64.2%.

1975

 Haldia Refinery commissioned. Multipurpose Distribution Centres introduced at 132 Retail

Outlets pioneering rural convenience.

1977

 Nutan wick stove launched by R&D Centre.

1978

 Phase-wise commissioning of Salaya-Mathura crude oil pipeline begins.

1981

 Digboi Refinery and Assam Oil Company's (AOC) marketing operations vested in IndianOil
and it became Assam Oil Division (AOD) of IndianOil.

1982

 Mathura Refinery and Mathura-Jalandhar Pipeline commissioned.

1983

 Massive augmentation of LPG storage and distribution facilities undertaken.

 Proposal for the 6 MMTPA Refinery at Karnal submitted.

1984

 Taluka Kerosene Depots (TKDs) commissioned for improved availability of kerosene in

rural and hilly areas in addition to Multipurpose DistributionCentres.
 Foreshore Terminal at Kandla Port commissioned.
 Integrated Corporate Planning – a 10-year Perspective Plan and 5-year Long Range Plan –
initiated.

1985

 New office complex for Registered Office of the Corporation and HeadOffice of Marketing
Division in Mumbai completed.

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1986

 A new Foreshore Terminal at Madras commissioned.

1987

 Test marketing of 5 kg LPG cylinders begins in 1986-87 in Garo Hills and Kumaon.

1989

 Salaya-Mathura crude oil pipeline suitably modified for handling Bombay High Crude
during winter.

1990

 Kandla-Bhatinda product pipeline project approv

 First LPG Bottling Plant of Assam Oil Division (AOD) commissioned at Silchar.

1991

 Digboi Refinery modernisation project initiated.

 Bunkering facility at Paradip commissioned.
1993

 New era Micro-processor based Distributed Digital Control Systems replacing the pneumatic
instrumentations began in refineries.

1994

 India's first Hydrocracker commissioned at Gujarat Refinery.

 Vision-2000, the Retail Visual Identity programme launched to upgrade retail outlets.
1995
 1,443 km. long Kandla-Bhatinda product pipeline commissioned.
 First lndane Home Shoppe launched.
1996
 State-of-the-art LPG Import Terminal at Kandla (capacity of 6,00,000 tonnes per annum)
commissioned.
 First batch of one-year International MBA (iMBA) programme passes out of IndianOil
Institute of Petroleum Management (IIPM)
1997

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 Business Development received renewed thrust with new functional group.
 Indian Oil enters into LNG business through Petronet LNG -a JV company.

1997
 Panipat Refinery was commissioned.
 Haldia, Barauni Crude Oil Pipeline (HBCPL) was completed.
 The Administrative Pricing Mechanism (APM) was withdrawn from the Refining Sector
effective 1" April 1998. Phase-wise dismantling of APM began.

1999
 Indian Hydrocarbon Vision -2025" was announced at PETROTECH-99, organised by Indian
Oil on behalf of the oil Industry.
 Diesel Hydro-desulphurisation Units commissioned at Gujarat, Panipat, Mathura and Haldia
Refineries.
 Manthan -- the IT re-engineering project was launched.

2000
 Indian Oil crossed the turnover of the magical mark of Rsl ,00,000Crore -- the first Corporate
in India to do so.
 Indian Oil entered into Exploration & Production (E&P) with the award of two exploration
blocks to Indian Oil and ONGC consortium under NELP-1
 Y2K compatibility achieved.
 JNPT Terminal was commissioned.

2001
 Digboi Refinery completed 100 years of continuous operation.
 Chennai Petroleum Corporation Ltd. (CPCL) and Bongaigaon Refinery and Petrochemicals
Ltd. (BRPL) were acquired.
 Fluidised Catalytic Cracker Unit at Haldia Refinery was commissioned.
 Augmentation of Kandla-Bhatinda Pipeline (KBPL) to 8.8 MMTPA completed.
 Eight Exploration blocks awarded to the Indian Oilled consortium under NELP-II.

2002
 APM dismantled. Pricing of Petroleum products decontrolled.
 IBP Co. Ltd. was acquired with management control.
 Barauni Refinery expansion project completed.
 New generation auto fuels IOC Premium and Diesel Super introduced.

2003
 Lanka IOC Pvt. Ltd. (LIOC) launched in Sri Lanka.
 Retail operations began in Sri Lanka. Indian Oil became the first Indian Petroleum Company
to begin downstream marketing operations in overseas market. Lanka IOC became an
independent oil company in Sri Lanka
 Gasahol, 5% ethanol blended petrol, was introduced in select states.
 INDMAX unit at Guwahati Refinery commissioned.

16
2004
 Indian Oil turned a Gas marketer by sale of regasified LNG.
 Indian Oil Mauritius Ltd.’s 18 TMT state-of-the-art Oil Storage Terminal at Mer Rouge
commissioned
 Lanka IOC Pvt. Ltd. (LIOC) launched in Sri Lanka.
 Gasahol, 5% ethanol blended petrol, was introduced in select states.
 INDMAX unit at Guwahati Refinery commissioned.
 Foundation Stone of Panipat Refinery Expansion and PX/PTA projects laid.
 Maiden LPG supplies to Port Blair.

2005
 The year marked Indian Oil's big ticket entry into the high stakes business of E&P.
 Indian Oil's Mathura Refinerywas the first refinery in India to attain the capability of
producing entire quantity of Euro-III compliant diesel by commissioning the Rs 1046 crore
DHDT (Diesel hydrotreating unit).
 Indian Oil breached the Rs 150, 000 crore mark in sales turnover by clocking Rs 150, 677 in
turnover in fiscal 2004.
 Indian Oil signed a JV agreement with GAIL to enter the city gas distribution projects in
Agra and Lucknow.
 Indian Oil allowed by Government of India to charter crude oil ships on its own instead of
going through Transchart, the chartering wing of the Ministry of Shipping.

2006
 Panipat Refinery capacity enhanced from 9 to 12 MMTPA
 World-scale Paraxylene/Purified Terephthalic Acid (PX/PTA) plant commissioned at Panipat
as mother plant for polyester industry
 Chennai-Trichy-Madurai product pipeline dedicated to the nation.

2007
 Marketing subsidiary IBP Co. Ltd. merged with parent company.
 Concept of SERVOXpress Centres as one-stop shops for autocare services launched.
 Mundra-Panipat crude oil pipeline with facilities for handling heavy crude oil commissioned.
 Lanka IOC commissions Lube Blending Plant and laboratory for testing fuels and lubricants
at Trincomalee
 Concept of ‘LNG at the doorstep’ launched for customers located away from gas pipelines

2008
 SERVO lubricants launched in Oman.
 IndianOil Chairman elected as President of World LP Gas Association.

2009
 Essar Oil is reported to have expanded the number of its fuel retail outlets to over 1,000, with
plans to have around 1,400 outlets operational by April 2009. Unconfirmed reports said that

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 Essar claimed a market share of around four per cent, and was aiming to increase it further to
over six per cent.

1.1.2 Organizational Chart

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1.1.3 Products/Service Offerings

PRODUCTS

Indian Oil is not only the largest commercial enterprise in the country it is the flagship corporate
of the Indian Nation. Besides having a dominant market share, Indian Oil is widely recognized as
India’s dominant energy brand and customers perceive Indian Oil as a reliable symbol for high
quality products and services.
Benchmarking Quality, Quantity and Service to world-class standards is a philosophy that Indian
Oil adheres to so as to ensure that customers get a truly global experience in India.
Indian Oil is a heritage and iconic brand at one level and a contemporary, global brand at another
level. While quality, reliability and service remains the core benefits to the customers.

 Auto gas

 Indian Oil Aviation Service

 Bitumen

 High Speed Diesel

 Bulk / Industrial Fuel

 Indane Gas

 SERVO Lubricants & Greases

 Marine Fuels & Lubricants

 MS / Gasoline

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  Petrochemicals

 Special Products

 Superior Kerosene Oil

 Crude Oil

INTRODUCTION TO BARAUNI REFINERY

The Barauni Refinery in Eastern India was commissioned in 1964 with a capacity of 2.0
MMTPA. The refining capacity was increased to 3.0 MMTPA by 1969 and
Fluidized Catalytic Cracker) and hydrotreater facilities for diesel quality improvement have
been added. With the commissioning of the 6.0 MMTPA Haldia-Barauni crude oil pipeline, the
refinery now received imported crude for processing. A CRU (Catalytic Reformer Unit) was
also added to the refinery in 1997 for production of unleaded motor spirit. Projects are also
planned for meeting future fuel quality requirements. Barauni refinery supplies distillate
products beside eastern India to northern India through a product pipeline to Kanpur in Uttar
Pradesh. The year 2008-09 saw Barauni Refinery achieve the highest ever-crude throughput of
5.94 MMT, beating the previous best of 5.63 MMT, which was achieved in 2007-08, along with
sustaining the distillate yield of more than 85% (i.e. 85.7%) year after year

Barauni refinery achieved lowest ever 65.5 MBN of energy in the year 2008-09. It reduced
energy consumption by almost 10% over the previous fiscal year of 2007-08. It excellence safety
record during the year 2008-09 is another feather. Barauni Refinery Coker unit was declared as a
zero steam leak unit it has avoided any accidents in the unit during the year 2008-09. Barauni
petrochemicals plant is in the country the second oil refinery in the public sector and forms an
important part of the Indian petrochemical industry Indian Oil Corporation Ltd is speeding up

20
work on the high Sulphur crude maximization project at its Barauni refinery in Bihar. The
project is estimated to cost Rs 790 crore.

PRODUCTS FROM REFINERY

Indian Oil is not only the largest commercial enterprise in the country it is the flagship corporate
of the Indian Nation. Besides having a dominant market share, Indian Oil is widely recognized as
India’s dominant energy brand and customers perceive Indian Oil as a reliable symbol for high
quality products and services. Indian Oil is a heritage and iconic brand at one level and a
contemporary, global brand at another level. While quality, reliability and service remains the
core benefits to our customers, our stringent checks are built into operating systems, at every
level ensuring the trust of over a billion Indians over the last four decades. Indian oil has many
products but few products are as follows
1) Auto Gas

Auto Gas (LPG) is a clean, high octane, abundant and eco-friendly fuel. It is obtained from
natural gas through fractionation and from crude oil through refining. It is a mixture of petroleum
gases like propane and butane. The higher energy content in this fuel results in a 10% reduction
of CO2 emission as compared to MS. Auto Gas is a gas at atmospheric pressure and normal
temperatures, but it can be liquefied when moderate pressure is applied or when the temperature
is sufficiently reduced

2) INDIAN OIL AVIATION SERVICE

IndianOil Aviation Service is a leading aviation fuel solution provider in India and the most-
preferred supplier of jet fuel to major international and domestic airlines. Between one sunrise
and the next, IndianOil Aviation Service refuels over 1500 flights – from the bustling metros to
the remote airports linking the vast Indian landscape, from the icy heights of Leh (the highest
airport in the world at 10,682 ft) to the distant islands of Andaman & Nicobar. IndianOil is
India's first ISO-9002 certified oil company conforming to stringent global quality requirements
of aviation fuel storage & handling. IndianOil Aviation also caters to the fuel requirements of the
Indian Defense Services, besides refueling VVIP flights at all the airports and remote
heli-pads/heli-bases across the Indian subcontinent.

3) BITUMEN:

The common binders used in bituminous road constructions are road tars and Bitumen. Bitumen
has gradually replaced road tar for road construction purposes mainly because of its greater
availability as compared to road tars. It is principally obtained as a residual product in petroleum
refineries after higher tractions like gas, petrol, kerosene and diesel, etc., are removed generally

21
by distillation from suitable crude oil. Indian standard institutions define Bitumen as a black or
dark brown non-crystalline soil or viscous material having adhesive properties derived from
petroleum crude either by natural or by refinery processes.

4) HIGH SPEED DIESEL 

Indian Oil’s XTRAMILE Super Diesel, the leader in the branded diesel segment is blended with
world-class ‘Multi Functional Fuel Additives (MFA). XTRAMILE has brought in a huge savings
in the high mileage commercial vehicle segment. Transport fleets that operate a large number of
trucks crisscrossing the country are using XTRAMILE to not only obtain a higher mileage but
also for low maintenance costs.

5) INDANE GAS

Indane is today one of the largest packed-LPG brands in the world. IndianOil pioneered the
launch of LPG in India in the 1970s and transformed the lives of millions of people with the
introduction of the clean, efficient and safe cooking fuel. LPG also led to a substantial
improvement in the health of women in rural areas by replacing smoky and unhealthy chullahs
with Indane. It is today a fuel synonymous with safety, reliability and convenience.

6) SERVO LUBRICATING AND GREASES

Indian Oil’s SERVO range of lubricants reigns as the undisputed market leader in the Indian
lubricants market. Known for its cutting-edge technology and high-quality products, SERVO
backed by Indian Oil’s pioneering R&D, extensive blending and distribution network, sustained
brand enhancement and new generation packaging is a one-stop shop for complete lubrication
solutions in the automotive, industrial and marine segments.

7) MS/GASOLINE:

Automotive gasoline and gasoline-oxygenate blends are used in internal combustion spark-
ignition engines. These spark ignition engine fuels are primarily used for passenger cars.
XTRAPREMIUM Petrol is India’s leading branded petrol boosted with new generation
multifunctional additives known as friction busters that prevent combustion chamber deposits.
XTRAPREMIUM is custom designed to deliver higher mileage, more power, better pick up,
faster acceleration, enhanced engine cleanliness and lower emissions.

1.1.4 Market Served

 Bihar
 Bengal
 Some parts of U P ( Varansi, Allahabad, Robbertganj, Reenukoot)

22
  Nepal
(This is all about the Barauni Refinery Supply. IOCL group supplies his product in whole India)

1.1.5 Clients
END USERS:
Those users who are using the IOCL product in a optimam level and that customer or buyer,
consumer is a End user of the company.
1 Nepal Oil Company
2 Barauni thermal Power station
3 Tisco Jamshedpur
4 IFFCO phulpur
5 DIL Panki
6 Indian Railway
7 Public / People
8 Nalco (National aluminum company)
9 Balco (Bharat aluminum company)
10 Hindalco (Hinduja aluminum company)
.

23
1.1.6 Manufacturing Processes

24
1.2 Introduction to the Department

1.2.1 Summary of Departmental Activities

25
 CHAPTER- 2

Training

2.1 Introduction to the study

Financial Management is concerned with the duties of the finance manager in a business
firm. He performs such varied tasks as budgeting, financial forecasting, cash management,
credit administration, investment analysis and funds procurement. The recent trend towards
globalization of business activity has created new demands and opportunities in managerial
finance.
This study is focused on investment analysis which is called capital budgeting.

2.2 Training Objectives

 To know the process and techniques used for capital budgeting.

 To know how company takes investment decision

2.3 Trainee’s Job Profile

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2.4 Trainee’s Contribution

2.4 Learning Objectives

THEORITICAL BACKGROUND
CAPITAL BUDGETING

Capital budgeting or investment decision is the planning process used to determine whether an
organization's long term investments such as new machinery, replacement machinery, new
plants, new products, and research development projects are worth the funding of cash through
the firm's capitalization structure (debt, equity or retained earnings). It is the process of allocating
resources for major capital, or investment, expenditures. One of the primary goals of capital
budgeting investments is to increase the value of the firm to the shareholders.

DEFINITION:-
Capital budgeting is the planning of long-term corporate financial projects relating to
investments funded through and affecting the firm's capital structure. Management must allocate
the firm's limited resources between competing opportunities (projects), which is one of the main
focuses of capital budgeting.
Capital budgeting is also concerned with the setting of criteria about which projects should
receive investment funding to increase the value of the firm, and whether to finance that
investment with equity or debt capital. Investments should be made on the basis of value-added
to the future of the corporation. Capital budgeting projects may include a wide variety of
different types of investments, including but not limited to, expansion policies, or mergers and
acquisitions. When no such value can be added through the capital budgeting process and excess
cash surplus exists and is not needed, then management is expected to pay out some or all of
those surplus earnings in the form of cash dividends or to repurchase the company's stock
through a share buyback program.
FEATURES OF INVESTMENT DECISIONS:

27
 The exchange of current funds for future benefits.
 The funds are invested in long-term assets.
 The future benefits will occur to the firm over a series of years.

CRITERIA FOR CHOOSING CAPITAL BUDGETING PROJECTS.

(1) Corporate management seeks to maximize the value of the firm by investing in projects
which yield a positive net present value when valued using an appropriate discount rate in
consideration of risk.
(2) These projects must also be financed appropriately.
(3) If no positive NPV projects exist and excess cash surplus is not needed to the firm, then
financial theory suggests that management should return some or all of the excess cash to
shareholders (i.e., distribution via dividends).
FACTORS INFLUENCING CAPITAL BUDGETING DECISIONS

 Availability of funds
 Structure of capital
 Taxation Policy
 Government Policy
 Lending Policies of Financial Institutions
 Immediate need of the Project
 Earnings
 Capital Return
 Economic Value of the Project
 Working Capital
 Accounting Practice
 Trend of Earning
 Risk of the business
 Forecast of the market
 Political unrest
 Geographical Condition
 Exchange Rate of Currency

NEEDS OF CAPITAL BUDGETING

 RISK: A long term commitment of funds may also change the risk complexity of the firm. If
the adoption of an investment increases average gain but causes frequent fluctuations in its
earnings, the firm will become more risky. The capital budgeting decisions shape the basic
character of the firm.

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  IRREVERSIBILITY: Long term investment once made can’t be reversed without
significance loss of invested capital. The investment becomes sunk and mistakes, rather than
being readily rectified, must often be borne until the firm can be withdrawn through
depreciation charges or liquidation. It influences the whole conduct of the business for the
years to come.

 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. A
firm’s decision to invest in long-term assets has a decisive influence on the rate and
directions of its growth. A wrong decision can prove disastrous for the continued survival of
the firm; unwanted or unprofitable expansions of assets will result in heavy operating costs to
the firm. On the other hand, inadequate investment in assets would make it difficult for the
firm to compete successfully and maintain its market share.

 FUNDING: Investment decisions generally involve large amount of funds, which make it
imperative for the firm to plan its investment programmes very carefully and make an
advance arrangement for procuring finances internally or externally.

 COMPLEXITY: Investment decisions are among the firm’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 the future cash flows of an investment. Economic, political,
social and technological forces cause the uncertainty in cash flow estimation.

OBJECTIVES OF CAPITAL BUDGETING

Capital budgets are the key control documents when it comes to the financial planning for long-
term investments such as major equipment purchases, land purchases, renovations or
new buildings. Capital budgeting identifies how much will be spent for the entire project,
tracking each line item separately. It explains how the business will pay for the capital project
and determines payback time and method.

Determine Product Scope

o Capital budgeting lets project planners define the financial scope of a project. Because capital
budgeting begins long before the project begins, it spells out how much money the business
plans to spend on each individual aspect of the project. For example, with a renovation, it
determines how much it is willing to spend on improving handicap accessibility or installing
energy-efficient heating units. Capital budgeting also determines the scope in terms of the length
of time the project will take as it also budgets for labor and potential downtime.

29
 Determine Funding Sources
o While capital budgeting spells out the details of project expenses, it also details where the money
is coming from to pay for the project. These sources might include a capital investment account,
cash, bank loans, government or non-profit grants or stock offerings. Most often, a project will
require a mix of those funding channels. The capital budgeting process identifies how much
money will be needed from each source and the costs associated with using that funding method.

Determine Payback Method

o An important element of capital budgeting is determining the project's payback time. Most
businesses expect a new building, new equipment or renovation to eventually pay for itself.
Some projects will pay for themselves quicker than others. As there are several ways of
calculating payback method, some involving the present value of money and inflation, the capital
budget will have to identify which method the company plans to use. It will also include an
estimate of how long it will take for the business to realize a return on their capital investment.

Control Project Costs

o Capital budgets act as control documents throughout the life of the project. As the project
progresses, the project managers track costs and try to ensure that the project stays within
budget. When there is an overage or a significant underage, the project managers must provide
explanations for the variances and the business must make sure it has money to complete the
project. Typically a capital budget for a specific project is maintained until the payback period is
complete.

Ongoing Projects
o Capital budgets are also used for on-going capital purchases. These include major repairs, rolling
computer upgrades and preventive maintenance. Because some of these type of expenses occur
on an emergency basis, capital budgeting allows a business to be prepared in a crisis and not
have to incur extra debt. This type of capital budgeting creates a fund that sets money aside for
necessary capital expenses, whether they can be anticipated or not.

CLASSIFICATION OF CAPITAL BUDGETING DECISIONS

Accept Reject Decisions: All the investment decisions which give more return than the cost
of capital they are acceptable while the investment decisions which give less return than the
cost of capital they are rejected. Thus firm will make investment only if the decision is
acceptable.

Mutually Exclusive Decisions: These are the decisions which compete with each other
which mean the acceptance of one automatically rejects the other decision. The firm has
various alternatives; once one alternative is selected the other alternatives are automatically
rejected.
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Capital Rationing or Ranking Decisions: In case the firm has various profitable investment
proposals in that case the firm had only option to rank them as per their profitability and then
accept them.

INVESTMENT EVALUATION CRITERIA

Three steps are involved in the evaluation of an investment:
 Estimation of cash flows.
 Estimation of required rate of return (the opportunity cost of capital).
 Application of a decision rule for making the choice.

INVESTMENT DECISION RULE

A sound appraisal technique should be used to measure the economic worth of an investment
project. The essential property of a sound technique is that it should maximize the
shareholder’s wealth. The following other characteristics should also be possessed by a
sound investment evaluation criterion:
 It should consider all cash flows to determine the true profitability of the project.
 It should provide for an objective and unambiguous way of separating good projects from
bad projects.
 It should help ranking of projects according to their true profitability.
 It should recognize the fact that bigger cash flows are preferable to smaller ones and
early cash flows are preferable to later ones.
 It should help to choose among mutually exclusive projects that projects which
maximizes the shareholders’ wealth.
 It should be a criterion which is applicable to any conceivable investment project
independent of others.

EVALUATION CRITERIA or TECHNIQUES

A number of investment criteria or capital budgeting techniques are in use in practice.

 DISCOUNTED CASH FLOW CRITERIA

 Net Present Value (NPV)
 Internal Rate of Return(IRR)
 Profitability Index (PI)
 NON-DISCOUNTED CASH FLOW CRITERIA
 Payback Period (PB)
 Accounting Rate of Return(ARR)

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NET PRESENT VALUE METHOD

The net present value method is the classic economic method of evaluating the investment
proposals. It is a DCF technique that explicitly recognizes the time value of money. It
correctly postulates that cash flows arising at different time periods differ in value and are
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 flows. The
appropriate discount rate is the project’s opportunity cost of 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 the opportunity cost of capital as
the discount rate.
 Net present value should be found out by subtracting present value of cash outflows from
present value of cash inflows. The project should be accepted if NPV is positive
(NPV>0).

ACCEPTANCE RULE

It should be clear that the acceptance rule using the NPV method is to accept the investment
project if its net present value is positive (NPV>0) and to reject if the net present value is
negative (NPV<0). Positive NPV contributes to the net wealth of the shareholders, which
should result in the increased price of a firm’s share. The positive net present value will
result only if the project generates cash inflows at a rate higher than the opportunity cost of
capital. A project with zero NPV (NPV=0) may be accepted. A zero NPV implies that
project generates cash flows at a rate just equal to the opportunity cost of capital.
 Accept the project when NPV is positive NPV>0
 Reject the project when NPV is negative NPV<0
 May accept the project when NPV is ZERO NPV=0

The NPV method can be used to select between mutually exclusive projects; the one with the
higher NPV should be selected.Using the NPV method, projects would be ranked in order of
net present values; that is, first rank will be given to the project with highest positive net
present value and so on.

EVALUATION OF THE NPV METHOD

NPV is the true measure of an investment’s profitability. It provides the most acceptable
investment rule for the following reasons:
 Time value: It recognizes time value of money-a rupee received today is worth more
than a rupee received tomorrow.

32
 Measure of true profitability: it uses all cash flows occurring over the entire life of the
project in calculating its worth. Hence, it is a measure of the project’s true profitability.
The NPV method relies on estimated cash flows and the discount rate rather than any
arbitrary assumptions, or subjective considerations.

 Value-additivity: The discounting process facilitates measuring cash flows in terms of

present values; that is, in terms of equivalent, current rupees. Therefore, the NPVs of
projects can be added.
NPV(A+B) = NPV(A) + NPV(B)
This is called the value-additivity principle.

 Shareholders’ value: the NPV method is always consistent with the objective of the
shareholder value maximization. This is the greatest virtue of the method.

LIMITATIONS OF NPV

 Cash flow estimation: The NPV method is easy to use if forecasted cash flows are
known. In practice it is very difficult to obtain the estimates of cash flows due to
uncertainty.

 Discount rate: It is also difficult in practice to precisely measure the discount rate.

 Mutually exclusive projects: caution needs to be applied in using the NPV method
when alternative projects with unequal lives, or under funds constraint are evaluated. The
NPV rule may not give unambiguous results in these situations.

 Ranking of projects: It should be noted that the ranking of the projects as per the NPV
rule is not independent of the discount rates.

INTERNAL RATE OF RETURN METHOD

The internal rate of return (IRR) method is another discounted cash flow technique, which
takes account of the magnitude and timing of cash flows. Other terms used to describe the
IRR method are yield on an investment, marginal efficiency of capital, rate of return over
cost, time-adjusted rate of internal return and so on. The concept is quite simple to
understand in the case of a one-period project. The rate of return depends on the project’s
cash flows, rather than any outside factor, therefore it is referred as INTERNAL RATE OF
RETURN. The internal rate of return (IRR) is the rate that equates the investment outlay with
the present value of cash inflow received after one period. This also implies that the discount
rate at which NPV becomes zero.

33
It can be noticed that the IRR equation is same as the one used for the NPV method. In the
NPV method, the required rate of return, k, is known and the NPV is found, while in the IRR
method the value of R has to be determined at which the NPV becomes ZERO.

ACCEPTANCE RULE

The accept or reject 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). Here k is known as the required
rate of return, or the cut-off or hurdle rate. The project shall be rejected if its internal rate of
return lower than the opportunity cost of capital (r<k). The decision maker may remain
indifferent if the internal rate of return is equal to the opportunity cost of capital.
Thus the IRR acceptance rules are:
 Accept the project when r>k
 Reject the project when r<k
 May accept the project when r=k

EVALUATION OF IRR METHOD

IRR method is like the NPV method. It is a popular investment criterion since it measures
profitability as a percentage and can be easily compared with the opportunity cost of capital.

MERITS OF IRR METHOD

 Time value: The IRR method recognizes the time value of money.
 Profitability Measure: It considers all cash flows occurring over the entire life of the
project to calculate its rate of return.
 Acceptance Rule: It generally gives the same acceptance rule as the NPV method.
 Shareholders’ value: It is consistent with the shareholders’ wealth maximization
objective. Whenever a project’s IRR is greater than the opportunity cost of capital, the
shareholders’ wealth will be increased.

DEMERITS OF IRR METHOD

 Multiple rates: A project may have multiple rates, or it may not have a unique rate of
return. These problems arise because of mathematics of IR computation.
 Mutually exclusive projects: It may also fail to indicate a correct choice between
mutually exclusive projects under certain situations.
 Value additivity: Unlike in the case of the NPV method, the value additivity principle
does not hold when the IRR method is used-IRRs of projects do not add. Thus for
Projects A and B, IRR (A)+IRR (B) need not to be equal to IRR (A+B).

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NPV vs IRR

 IRR assumes that the cash flows are reinvested in the projected at the same discount rate.
This is a major limitation for the use of IRR. NPV makes no such assumption.
 NPV is measured in terms of currency whereas IRR is measured in terms of expected
percentage return.
 If NPV calculation uses different discount rates, then it produces different results for the
same project. But, IRR always gives the same result. For the same reason, given a choice
between NPV vs IRR, managers generally prefer IRR because it is easier and less confusing.
 From a comparison of NPV and IRR, it can be seen that NPV is actually a better measure
than IRR, especially, in long term projects, not only because NPV considers different
discount rates but also takes into account the cost of capital.

PROFITABILITY INDEX

Profitability Index is the ratio of the present value of cash inflows, at the required rate of
return, to the initial cash outflow of the investment. The formula for calculating benefit-cost
ratio or profitability index is as follows:

PI= PV of cash inflows/Initial Cash Outlay

ACCEPTANCE RULE

The project with positive NPV will have PI greater than one. PI less than that means that the
project’s NPV is negative.
 Accept the project when PI > 1
 Reject the project when PI < 1
 May accept the project when PI = 1

EVALUATION OF PI METHOD

It is a variation of the NPV method, and requires the same computation as the NPV method.
 Time Value: It recognizes the time value of money.
 Value Maximization: It is consistent with the shareholder value maximization principle.
A project with PI greater than 1 will have positive NPV and if accepted, it will increase
shareholders’ wealth.
 Relative Profitability: In the PI method, since the present value of cash inflows is
divided by the initial cash outflow, it is a relative measure of a project’s profitability.

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PAYBACK

The payback PB is one of the most popular and widely recognized traditional methods of
evaluating investment proposals. Payback is the number of years required to recover the
original cash outlay invested in a project. If the project generates constant annual cash
inflows, the payback period can be computed by dividing cash outlay by the annual cash
inflow.

Payback = Initial Investment / Annual Cash Inflow

Acceptance Rule

Many firms use the payback period as an investment evaluation criterion and a method of
ranking projects. They compare the project’s payback with a predetermined, standard
payback. The project would be accepted if it’s payback period is less than the maximum or
standard payback period set by management. As a ranking method, it gives highest ranking
to project, which has the shortest payback period and lowest ranking to the project with
highest payback period. Thus, if the firm has to choose between two mutually exclusive
projects, the project with shorter payback period will be selected.

Evaluation of Payback

 Simplicity: The most significant merit of payback is that it is simple to understand and
easy to calculate. The business executives consider the simplicity of method as a virtue.
This is evident from their heavy reliance on it for appraising investment proposals in
practice.
 Cost Effective: Payback method costs less than most of the sophisticated techniques that
require a lot of the analysts’ time and the use of computers.
 Short-term effects: A company can have more favorable short-run effects on earnings
per share by setting up a shorter standard payback period. It should be remembered that
this may not be a wise long-term policy as the company may have to sacrifice its future
growth for current earnings.
 Risk shield: The Risk of the project can be tackled by having a shorter standard payback
period as it may ensure guarantee against loss. A company has to invest in many projects
where the cash inflows and life expectancies are highly uncertain.
 Liquidity: The emphasis in payback is on the early recovery of the investment. Thus, it
gives an insight into the liquidity of the project. The funds so released can be put to other
uses.

Demerits

 Cash flows ignored: Payback is not an appropriate method of measuring the profitability
of an investment project as it does not consider all cash inflows yielded by the project.

36
 Cash flow patterns: payback fails to consider the pattern of cash inflows, i.e., magnitude
and timing of cash inflows. In other words, it gives equal weights to returns of equal
amounts even though they occur in different time periods.
 Administrative difficulties: A firm may face difficulties in determining the maximum
acceptable payback period. There is no rational basis for setting a maximum payback
period. It is generally a subjective decision.
 Inconsistent with shareholder value: Payback is not consistent with the objective of
maximizing the market value of the firm’s shares. Shares values do not depend on
payback periods of investment projects.

ACCOUNTING RATE OF RETURN METHOD

The accounting rate of return (ARR), also known as the return on investment (ROI), uses
accounting information, as revealed by financial statements, to measure the profitability of an
investment. The accounting rate of return is the ratio of the average after tax profit divided
by the return is the ratio of the average after tax profit divided by the average investment.
The average investment would be equal to half of the original investment if it were
depreciated constantly. Alternatively, it can be found out by dividing the total of the
investment’s book values after depreciation by the life of the project. The accounting rate of
return, thus, is an average rate and can be determined by the following equation:

ARR= Average income / Average Investment

ACCEPTANCE RULE

As an accept-reject criterion, this method will accept all those projects whose ARR is higher
than the minimum rate established by the management and reject those projects which have
ARR less than the minimum rate. This method would rank a project as number one if it has
highest ARR and lowest rank would be assigned to the project with lowest ARR.

EVALUATION OF ARR METHOD

 Simplicity: The ARR method is simple to understand and use. It does not involve
complicated computations.
 Accounting Data: The ARR can be readily calculated from the accounting data; unlike
in the NPV and IRR methods, no adjustments are required to arrive at cash flows of the
project.
 Accounting Profitability: The ARR rule incorporates the entire stream of income in
calculating the project’s profitability.

LIMITATIONS OF ARR METHOD

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 Cash flows ignored: The averaging of income ignores the time value of money. In fact,
this method gives more weightage to the distant receipts.
 Arbitrary cut-off: The firm employing the ARR rule uses an arbitrary cut-off yardstick.
Generally, the yardstick is the firm’s current return on its assets (book-value). Because of
this, the growth companies earning very high rates on their existing assets may reject
profitable projects and the less profitable companies may accept bad projects.

Modified Internal Rate of Return (MIRR):

While the internal rate of return (IRR) assumes the cash flows from a project are reinvested at
the IRR, the modified IRR assumes that positive cash flows are reinvested at the firm's cost of
capital, and the initial outlays are financed at the firm's financing cost. Therefore, MIRR more
accurately reflects the cost and profitability of a project. 

The Modified Internal Rate of Return (MIRR) is a financial measure of an investment's

attractiveness. It is used in capital budgeting to rank alternative investments of equal size. As
the name implies, MIRR is a modification of the internal rate of return (IRR) and as such
aims to resolve some problems with the IRR.

Since investment at the cost of capital is generally more realistic, the modified IRR (MIRR)
is a better indicator of a project’s true profitability . The MIRR also solves the problem of
Multiple IRRs.

The MIRR method appears to be better than the standard IRR.

The formula for MIRR is:

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CAPITAL BUDGETING TECHNIQUES

Capital budgeting (or investment appraisal) is the planning process used to determine whether a
firm’s long term investment such as new machinery, replacement machinery, new plant, new
product , and research development projects are worth pursuing. It is budget for major capital, or
investment, expenditures.

Any investment decision depends upon the decision rule that is applied under circumstances.
However, the decision rule itself considers following inputs.
The effectiveness of the decision rule depends on how these three factors have been properly
assessed. Estimation of cash flows requires immense understanding of the project before it is
implemented; particularly macro and micro view of the economy, polity and the company.
Project life is very important; otherwise it will change the entire perspective of the project. So
great care is required to be observed for estimating the project life. Cost of capital is being
considered as discounting factor which has undergone a change over the years. Cost of capital
has different connotations in different economic philosophies.
Particularly, India has undergone a change in its economic ideology from a closed-economy to
open-economy. Hence determination of cost of capital would carry greatest impact on the
investment evaluation.
This chapter is focusing on various techniques available for evaluating capital budgeting
projects. I shall discuss all investment evaluation criteria from its economic viability point of
view and how it can help in maximizing shareholders’ wealth.

We shall also look for following general virtues in each technique:

 It should consider all cash flows to determine the true profitability of the project.
 It should provide for an objective and unambiguous way of separating good projects from
bad projects.
 It should help ranking of projects according to its true profitability.

39
 It should recognize the fact that bigger cash flows are preferable to smaller ones and early
cash flows are preferable to later ones.
 It should help to choose among mutually exclusive projects that project which maximizes the
shareholders’ wealth.
 It should be a criterion which is applicable to any conceivable investment project
independent of others.

A number of capital budgeting techniques are used in practice. They may be grouped in the
following two categories: -
I. Capital budgeting techniques under certainty; and
II. Capital budgeting techniques under uncertainty

2.2 Capital budgeting techniques under certainty:

Capital budgeting techniques (Investment appraisal criteria) under certainty can also be divided
into following two groups:

2.2.1 Non-Discounted Cash Flow Criteria: -

(a) Pay Back Period (PBP)
(b) Accounting Rate Of Return (ARR)

2.2.2 Discounted Cash Flow Criteria: -

(a) Net Present Value (NPV)
(b) Internal Rate of Return (IRR)
(c) Profitability Index (PI)

2.2.1 Non-Discounted Cash Flow Criteria:

These are also known as traditional techniques:
(a) Pay Back Period (PBP): The payback period (PBP) is the traditional method of capital
budgeting. It is the simplest and perhaps, the most widely used quantitative method for
appraising capital expenditure decision.

Meaning: It is the number of years required to recover the original cash outlay invested in a
project.

Methods to compute PBP:

There are two methods of calculating the PBP.
(a) The first method can be applied when the CFAT is uniform. In such a situation the initial cost
of the investment is divided by the constant annual cash flow: For example, if an investment of
Rs. 100000 in a machine is expected to generate cash inflow of Rs. 20,000 p.a. for 10 years. Its
PBP will be calculated using following formula:
(b) The second method is used when a project’s CFAT are not equal. In such a situation PBP is
calculated by the process of cumulating CFAT till the time when cumulative cash flow becomes
equal to the original investment outlays.

Decision Rule:
The PBP can be used as a decision criterion to select investment proposal.

40
  If the PBP is less than the maximum acceptable payback period, accept the project.
 If the PBP is greater than the maximum acceptable payback period, reject the project.
This technique can be used to compare actual pay back with a standard pay back set up by the
management in terms of the maximum period during which the initial investment must be
recovered. The standard PBP is determined by management subjectively on the basis of a
number of factors such as the type of project, the perceived risk of the project etc. PBP can be
even used for ranking mutually exclusive projects. The projects may be ranked according to the
length of PBP and the project with the shortest PBP will be selected.

Merits:
1. It is simple both in concept and application and easy to calculate.
2. It is a cost effective method which does not require much of the time of finance executives as
well as the use of computers.
3. It is a method for dealing with risk. It favour projects which generates substantial cash inflows
in earlier years and discriminates against projects which brings substantial inflows in later years .
Thus PBP method is useful in weeding out risky projects.
4. This is a method of liquidity. It emphasizes selecting a project with the early recovery of the
investment.

Demerits:
1. It fails to consider the time value of money. Cash inflows, in pay back calculations, are simply
added without discounting. This violates the most basic principles of financial analysis that
stipulates the cash flows occurring at different points of time can be added or subtracted only
after suitable compounding/ discounting.
2. It ignores cash flows beyond PBP. This leads to reject projects that generate substantial
inflows in later years.

(c) Break-even Analysis:

In sensitivity analysis one may ask what will happen to the project if sales decline or costs
increase or something else happens. A financial manager will also be interested in knowing how
much should be produced and sold at a minimum to ensure that the project does not 'lose money'.
Such an exercise is called break even analysis and the minimum quantity at which loss is avoided
is called the break-even point. The break-even point may be defined in accounting terms or
financial terms.

(d) Simulation analysis:

Sensitivity analysis and Scenario analysis are quite useful to understand the uncertainty of the
investment projects. But both the methods do not consider the interactions between variables and
also, they do not reflect on the probability of the change in variables.

ACCOUNTING RATE OF RETURN

ARR is considered a straight-line method of gathering quantitative information. While this is a

positive measure in some aspects, its lack of sophistication is also a drawback. ARR does not
consider the time value of money, which means that returns taken in during later years may be

41
worth less than those taken in now, and does not consider cash flows, which can be an integral
part of maintaining a business.

B) DISCOUNTED CASH FLOW CRITERIA

 NET PRESENT VALUE

In finance, the net present value (NPV) or net present worth (NPW) of a time series of cash
flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the
individual cash flows of the same entity.

In the case when all future cash flows are incoming (such as coupons and principal of a bond)
and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows
minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow
(DCF) analysis and is a standard method for using the time value of money to appraise long-term
projects. Used for capital budgeting and widely used throughout economics, finance, and
accounting, it measures the excess or shortfall of cash flows, in present value terms, above the
cost of funds.

NPV can be described as the “difference amount” between the sums of discounted: cash inflows
and cash outflows. It compares the present value of money today to the present value of money
in the future, taking inflation and returns into account.

The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or
discount curve and outputs a price; the converse process in DCF analysis — taking a sequence of
cash flows and a price as input and inferring as output a discount rate (the discount rate which
would yield the given price as NPV) — is called the yield and is more widely used in bond
trading.

 INTERNAL RATE OF RETURN

The internal rate of return on an investment or project is the "annualized effective compounded
return rate" or "rate of return" that makes the net present value (NPV as NET*1/(1+IRR)^year)
of all cash flows (both positive and negative) from a particular investment equal to zero. It can
also be defined as the discount rate at which the present value of all future cash flow is equal to
the initial investment or in other words the rate at which an investment breaks even.

In more specific terms, the IRR of an investment is the discount rate at which the net present
value of costs (negative cash flows) of the investment equals the net present value of the benefits
(positive cash flows) of the investment.

IRR calculations are commonly used to evaluate the desirability of investments or projects. The
higher a project's IRR, the more desirable it is to undertake the project. Assuming all projects
require the same amount of up-front investment, the project with the highest IRR would be
considered the best and undertaken first.

42
A firm (or individual) should, in theory, undertake all projects or investments available with
IRRs that exceed the cost of capital. Investment may be limited by availability of funds to the
firm and/or by the firm's capacity or ability to manage numerous projects.

Uses of IRR

Because the internal rate of return is a rate quantity, it is an indicator of the efficiency, quality, or
yield of an investment. This is in contrast with the net present value, which is an indicator of the
value or magnitude of an investment.

An investment is considered acceptable if its internal rate of return is greater than an established
minimum acceptable rate of return or cost of capital. In a scenario where an investment is
considered by a firm that has shareholders, this minimum rate is the cost of capital of the
investment (which may be determined by the risk-adjusted cost of capital of alternative
investments). This ensures that the investment is supported by equity holders since, in general,
an investment whose IRR exceeds its cost of capital adds value for the company (i.e., it is
economically profitable).

Calculation

Given a collection of pairs (time, cash flow) involved in a project, the internal rate of return
follows from the net present value as a function of the rate of return. A rate of return for which
this function is zero is an internal rate of return.

Given the (period, cash flow) pairs ( , ) where is a positive integer, the total number of
periods , and the net present value , the internal rate of return is given by in:

The period is usually given in years, but the calculation may be made simpler if is calculated
using the period in which the majority of the problem is defined (e.g., using months if most of
the cash flows occur at monthly intervals) and converted to a yearly period thereafter.

Any fixed time can be used in place of the present (e.g., the end of one interval of an annuity);
the value obtained is zero if and only if the NPV is zero.

In the case that the cash flows are random variables, such as in the case of a life annuity, the
expected values are put into the above formula.

Often, the value of “ ” cannot be found analytically. In this case, numerical methods or graphical
methods must be used.

43
  PROFITABILITY INDEX
An index that attempts to identify the relationship between the costs and benefits of a proposed
project through the use of a ratio calculated as:

Terminal Value
The terminal value of an asset is its anticipated value on a certain date in the future. It is used in
multi-stage discounted cash flow analysis and the study of cash flow projections for a several-
year period. The perpetuity growth model is used to identify ongoing free cash flows. The exit or
terminal multiple approach assumes the asset will be sold at the end of a specified time period,
helping investors evaluate risk/reward scenarios for the asset. A commonly used value is
enterprise value/EBITDA (earnings before interest, tax, depreciation and amortization) or
EV/EBITDA. An asset's terminal value is a projection that is useful in budget planning, and also
in evaluating the potential gain of an investment over a specified time period.

Salvage Value
The estimated value that an asset will realize upon its sale at the end of its useful life is called
salvage value of an asset. The value is used in accounting to determine depreciation amounts and
in the tax system to determine deductions. The value can be a best guess of the end value or can
be determined by a regulatory body.

44
 CHAPTER- 3
Business Analysis

SWOT ANALYSIS

STRENGTHS

HIGH FOREIGN EXCHANGE DEBT.

IOCL has managed to significantly cut its borrowing cost due to high share of foreign exchange
debt. Its share of foreign exchange borrowings is increasing with foreign exchange loans
crossing 50% of its total debt compared to 42% at the end of the last financial year.

HIGHEST MARKET SHARE

As India's flagship national oil company, Indian Oil accounts for 56% petroleum products
market share, 42% national refining capacity and 67% downstream pipeline throughput capacity.

EXPERTISE IN OIL & GAS INDUSTRY

Indian Oil is one of the leaders in providing engineering, construction and consultancy services
to the pipeline industry. Highly qualified professionals with vast experience execute pipeline

45
projects from concept to commissioning and provide services for construction supervision and
project management.

FOREIGN SUBSIDIARIES AND JOINT VENTURES

Indian Oil is strengthening its existing overseas marketing ventures and simultaneously scouting
new opportunities for marketing and export of petroleum products in foreign markets. Two
wholly owned subsidiaries are already operational in Sri Lanka and Mauritius, and regional
offices at Dubai and Kuala Lumpur are coordinating expansion of business activities in Middle
East and South East Asia regions. The Corporation has launched eleven joint ventures (listed
separately) in partnership with some of the most respected corporate from India and abroad .

WEAKNESSES

STRINGENT CORPORATE POLICIES

The decisions relating to administration are taken at the corporate level. Even minor proposals
are to be referred to the top management. This leads to a delay in decision-making.

LACK OF MARKETING EFFORTS

Among the public sector oil companies, Indian Oil Corporation is the only one to follow a weak
marketing strategy. It in only in the recent years that the company has started to market its
products. However, still the efforts seem to be weak when compared with the competitors like
BPCL and HPCL.

PROMOTION POLICY

Most of the public sector companies seem to suffer from these lacunae. The employees are
promoted mainly on the basis of experience and not on the efforts and initiatives displayed by the
employee in his work. This results in demotivation and lack of interest for their work on the part
of the hardworking employees, who then tend to shift jobs to satisfy their need for self-esteem.

46
TENDER PROCESS

The policy of selection of the lowest bidder tends to affect the quality of the products/services on
some occasions. A more simplistic procedure is also likely to generate some savings for the
company, since tendering process leads to expenses on account of advertisement.

OPPORTUNITIES

Exploration and Production

Indian Oil is metamorphosing from a pure sectorial company with dominance in downstream in
India to a vertically integrated, transnational energy behemoth. The Corporation is making
investments in E&P and import/marketing ventures for oil and gas in India and abroad, and is
implementing a master plan to emerge as a major player in petrochemicals by integrating its core
refining business with petrochemical activities.

THREATS

Entry of Big Private players

The opening up of the oil sector for private players poses a threat even for this well-established
company. With Indian players like Reliance and Essar and foreign players like Shell planning
their entry into the Indian scenario, the road seems to be tough for Indian Oil.

47
 CHAPTER-4
Data Analysis & Interpretation

OPTION -1
Base case:
 Initial investment for Plant and machinery will be Rs.303 lakhs and Rs. 202 lakhs for two
years. The company will require 763 lakhs in the 9 th year and 7 lakhs in the 11 th year.
This is called cost of the project as well as the outflow for the project.
 Income Tax depreciation will be 15% for all the years, and additional 20% IT
depreciation will be calculated only in the first year.
 Minimum Alternative Tax that has to be charged will be @ 10.30% per year.
 Corporate Tax will be charged @ 30.90% per year.
 Salvage value or terminal value will be 30% of initial investment (152 lakhs).
 Sales Value will be at 100% capacity from first year of sales inflow. Sales inflow is
assumed to be of 300 lakhs and to remain constant throughout the life of the project.
 To operate this project Rs.43 lakhs is assumed to be spent per year from the date when
operation starts.
 Income tax outflow will be calculated by deducting operating cost and IT depreciation
from sales inflow, and from that the corporate tax percentage will be calculated. The
resulting amount will be income tax outflow.
 Capital Gain Tax is charged on Terminal Value of the project in the 16 th year, and it is
calculated (-40) Lakhs.
 Net Cash Flow is calculated by deducting operating cost and Income Tax outflow from
Sales Inflow.
 Depreciation is calculated by Written down Value method.

48
  IT Depreciation is charged on the Written down Value of the project per year. In First
year it will be 35% (15% + 20%).
 Values are rounded off to the nearest integer.
 Project’s IRR is calculated 29.57%.

OPTION -II
10% CAPEX increase:
 Initial investment in Plant and machinery for two years will be Rs.333 Lakhs and Rs.222
Lakhs respectively. In the 9th year it will increase to Rs.839lakhsand Rs.8lakhs in the 11th
year. This is called cost of the projects well as the outflow for the project.
 Income Tax depreciation will be 15% for all the years, and additional 20% IT
depreciation will be calculated only in the first year.
 Minimum Alternative Tax that has to be charged will be @ 10.30% per year.
 Corporate Tax will be charged @30.90% per year.
 Salvage value or terminal value will be 30% of initial investment(Rs.167 lakhs).
 Sales Value will be at 100% capacity from first year of sales inflow. Sales inflow is
assumed to be of Rs.300 lakhs and to remain constant throughout the life of the project.
 To operate this project Rs.43 lakhs is assumed to be spent per year from the date when
operation starts.
 Income tax outflow will be calculated by deducting operating cost and IT depreciation
from sales inflow, and from that the corporate tax percentage will be calculated. The
resulting amount will be income tax outflow.
 Capital Gain Tax is charged at Terminal Value of the project in the 16th year, and it is
calculated (-42) Lakhs.
 Net Cash Flow is calculated by deducting operating cost and Income Tax outflow from
Sales Inflow.
 Depreciation is calculated by Written Down Value method.
 IT Depreciation is charged on Written down value of the project per year. In First year it
is 35%(15% + 20%).
 Values are rounded off to the nearest integer.

49
  Project’s IRR is 26.61%.

OPTION -III
10% decrease in Margin :
 Initial investment in Plant and machinery will be in two years 303 and 202 respectively.
In the 9thyearit will require 763 lakhs and 7 lakhs in the 11 th year. This is called cost of
the project.
 Income Tax depreciation will be 15% in all the years, and additional 20% IT depreciation
will be calculated in the first year only.
 Minimum Alternative Tax will be charged @ 10.30% per year.
 Corporate Tax will be charged @30.90% per year.
 Salvage value or terminal value will be 30% of initial investment(152 lakhs).
 Sales Value will be at 100% capacity from first year of sales inflow. Sales inflow is
assumed to be of 270 lakhs and assumed to remain constant throughout the life of the
project.
 To operate this project Rs. 43 lakhs is assumed to spend per year from the date when
operation starts.
 Income tax outflow will be calculated by deducting operating cost and IT depreciation
from sales inflow, and then corporate tax percentage will be calculated. The resulting
amount will be considered as income tax outflow.
 Capital Gain Tax is charged at Terminal Value of the project in the 16th year, and it is
calculated (-40) Lakhs.
 Net Cash Flow is calculated by deducting operating cost and Income Tax outflow from
Sales Inflow.
 Depreciation is calculated by Written Down Value method.
 IT Depreciation is charged on Written down value of the project per year. In First year it
is 35%(15% + 20%).

50
  Values are rounded off to the nearest integer.
 Project’s IRR is calculated as 25.74%.

OPTION -IV
10% CAPEX Increase & 10% Decrease In Margin

 Initial investment in Plant and machinery will be in two years 333 and 222 respectively.
In the 9th year it will require 839lakhs and 8lakhs in the 11 th year. This is called cost of
the project.
 Income Tax depreciation will be 15% in all the years, and additional 20% IT depreciation
will be calculated in the first year only.
 Minimum Alternative Tax will be charged @ 10.30% per year.
 Corporate Tax will be charged @30.90% per year.
 Salvage value or terminal value will be 30% of initial investment(167 lakh).
 Sales Value will be at 100% capacity from first year of sales inflow. Sales inflow is
assumed to be of 270 lakhs and assumed to remain constant throughout the life of the
project.
 To operate this project Rs. 43 lakhs is assumed to spend per year from the date when
operation starts.
 Income tax outflow will be calculated by deducting operating cost and IT depreciation
from sales inflow, and then corporate tax percentage will be calculated. The resulting
amount will be considered as income tax outflow.
 Capital Gain Tax is charged at Terminal Value of the project in the 16th year, and it is
calculated (-44) Lakhs.
 Net Cash Flow is calculated by deducting operating cost and Income Tax outflow from
Sales Inflow.
 Depreciation is calculated by Written Down Value method.

51
 IT Depreciation is charged on Written down value of the project per year. In First year it
is 35% (15% + 20%).
 Values are rounded off to the nearest integer.
 Project’s IRR is calculated as 22.93%.

IRR

IRR
Base Case 29.57%
10% capacity
increase 26.61%
10% decrease of
margin 25.74%
10% cc and -10%
margin 22.93%

52
 IRR
35.00%
29.57%
30.00%
26.61% 25.74%
25.00% 22.93%
20.00%

15.00%

10.00%

5.00%

0.00%
Base Case 10% capacity 10% decrease of 10% cc and -10%
increase margin margin

Interpretation:-The rate of return depends on the project’s cash flows, rather than any outside
factor, therefore it is referred as INTERNAL RATE OF RETURN. The internal rate of return
(IRR) is the rate that equates the investment outlay with the present value of cash inflow received
after one period. This also implies that the discount rate at which NPV becomes zero.
In the above four cases i.e. Base case, 10% capacity increased case, 10% decrease in margin and
10% CC increase as well as 10% decrease in margin case, the IRR (Internal Rate of Return) is
29.57%, 26.61%, 25.74% and 22.93% respectively. So, the company can accept anyone of these
projects.

MIRR

MIRR
Base Case 15.43%
10% capacity increase 14.80%
10% decrease of
margin 14.62%
10% cc and -10%
margin 14.02%

53
 16.00%

15.50% 15.43% MIRR

15.00% 14.80%
14.62%
14.50%
14.02%
14.00%

13.50%

13.00%
Base Case 10% capacity 10% decrease of 10% cc and -10%
increase margin margin

Interpretation:- The MIRR appears to be much better than the standard IRR.While the
internal rate of return (IRR) assumes the cash flows from a project are reinvested at the
IRR, the modified IRR assumes that positive cash flows are reinvested at the firm's cost
of capital, and the initial outlays are financed at the firm's financing cost. Therefore,
MIRR more accurately reflects the cost and profitability of a project. MIRR is a rate of
return on modified set of cash flows.

In the above four cases i.e. Base case, 10% capacity increased case, 10% decrease in margin and
10% CC increase as well as 10% decrease in margin case, the MIRR (Modified Internal Rate of
Return) is 15.43%, 14.80%, 14.62% and 14.02% respectively. So, the company can accept any
one of these project.

Calculation of NPV
OPTION – I :-
Year Base Case
PV cash PV cash
Outflow Inflow 20% inflow cumulative outflow
1 303 0.83333 253
2 202 0.69444 140
3 232 0.5787 134 134
4 193 0.48225 93 227
5 191 0.40188 77 304
6 189 0.3349 63 367
7 187 0.27908 52 419

54
 8 186 0.23257 43 462
9 184 0.19381 36 498
10 183 0.16151 30 528
11 763 218 0.13459 29 557 103
12 212 0.11216 24 581
13 7 207 0.09346 19 600 1
14 203 0.07789 16 616
15 199 0.06491 13 629
16 196 0.05409 11 639
17 193 0.04507 9 648
18 192 0.03756 7 655

655 496

NPV 159

Pay Back:-
Investment
Year Payback Period
Initial 7 years and 2.8
Investment months
9th & 11th
year 8 years and above

Profitability Index:- PV Cash Inflow/ PV of cash outflow = 655/496 = 1.32

Interpretation:-
Pay Back Period of above base case for the initial investment of Rs. 505 lakhs is 7 years and 2.8
months. And for the investment of Rs. 770 lakhs in 9th year and 11th year is 8 year and above.
In the above base case the Profitability Index is 1.32%. In the above case i.e. Base case, the NPV
(Net Present Value) is Rs.159 lakhs, which is positive at the discount rate of 20%. So, the
company can accept this project.

55
OPTION – II:-

Pay Back:-

Year 10% Capacity Increase

Outflo PV cash Cumulativ PV cash
w Inflow 20% inflow e outflow
1 333 0.83333 278
2 222 0.69444 154
3 238 0.5787 138 138
4 194 0.48225 94 231
5 192 0.40188 77 308
6 190 0.3349 64 372
7 188 0.27908 52 424
8 186 0.23257 43 468
9 185 0.19381 36 503
10 184 0.16151 30 533
11 839 222 0.13459 30 563 113
12 215 0.11216 24 587
13 8 210 0.09346 20 607 1
14 204 0.07789 16 623
15 200 0.06491 13 636
16 197 0.05409 11 646
17 194 0.04507 9 655
18 209 0.03756 8 663

663 545

NPV 118
Investment
Year Payback Period
Initial
Investment 7 year and 8.8 month
9th & 11th year 8 years and above

56
Profitability Index:- PV Cash Inflow/ PV of cash outflow
=633/545
= 1.21

Interpretation:-
Pay Back Period of above base case for the initial investment of Rs. 555 lakhs is 7 years and 8.8
months. And for the investment of Rs. 847 lakhs in 9th year and 11th year is 8 years and above.
In the above base case the Profitability Index is 1.21%.
In the above case i.e. Base case, the NPV (Net Present Value) is Rs.118 lakhs, which is positive
at the discount rate of 20%. So, the company can accept this project.

OPTION-III :-

Year 10% Margin Decrease

Outflo Inflo PV cash cumulativ PV cash
w w 20% inflow e outflow
0.8333
1 303 3 253
2 202 0.6944 140

57
 4
3 211 0.5787 122 122
0.4822
4 172 5 83 205
0.4018
5 170 8 68 274
6 168 0.3349 56 330
0.2790
7 166 8 46 376
0.2325
8 165 7 38 415
0.1938
9 164 1 32 446
0.1615
10 163 1 26 472
0.1345
11 763 197 9 27 499 103
0.1121
12 191 6 21 520
0.0934
13 7 186 6 17 538 1
0.0778
14 182 9 14 552
0.0649
15 178 1 12 564
0.0540
16 175 9 9 573
0.0450
17 172 7 8 581
0.0375
18 192 6 7 588

588 496

NPV 92

Pay Back:-
Investment
Year Payback Period
Initial 9 years and 3.5
Investment months

58
 9th & 11th year 8 year and above

Profitability Index:- PV Cash Inflow/ PV of cash outflow

= 588/496
= 1.18

Interpretation:-
Pay Back Period of above base case for the initial investment of Rs. 505 lakhs is 9 years and 3.5
months. And for the investment of Rs. 770 lakhs in 9th year and 11th year is 8 year and above.
In the above base case the Profitability Index is 1.18%.
In the above case i.e. Base case, the NPV (Net Present Value) is Rs.92 lakhs, which is positive at
the discount rate of 20%. So, the company can accept this project.

59
OPTION – IV :-
Year 10% CC Increase & 10% Margin decrease
Outflo Inflo PV cash Cumulativ PV cash
w w 20% inflow e outflow
0.8333
1 333 3 278
0.6944
2 222 4 154
3 217 0.5787 126 126
0.4822
4 174 5 84 209
0.4018
5 171 8 69 278
6 169 0.3349 57 335
0.2790
7 167 8 47 381
0.2325
8 166 7 39 420
0.1938
9 164 1 32 452
0.1615
10 163 1 26 478
0.1345
11 839 201 9 27 505 113
0.1121
12 194 6 22 527
0.0934
13 8 189 6 18 544 1
0.0778
14 184 9 14 559
0.0649
15 180 1 12 571
0.0540
16 177 9 10 580
0.0450
17 174 7 8 588
0.0375
18 211 6 8 596

596 545

60
 NPV 50

Pay Back:-
Investment
Year Payback Period
Initial 11years and
Investment 8.8months
9th & 11th year 8 years and above

Profitability Index:- PV Cash Inflow/ PV of cash outflow

= 596/545
= 1.09

Interpretation:-
Pay Back Period of above base case for the initial investment of Rs. 555 lakhs is 11 years and 8.8
months. And for the investment of Rs. 847 lakhs in 9th year and 11th year is 8 year and above.
In the above base case the Profitability Index is 1.09%.
In the above case i.e. Base case, the NPV (Net Present Value) is Rs.50 lakhs, which is positive at
the discount rate of 20%. So, the company can accept this project.

61
 NPV

Case NPV
Base Case 159
10% capacity increase 118
10% decrease in
Margin 92
!0% CC and -10%
Margin 50

NPV
180
159
160
140
118
120
100 92
80
60 50
40
20
0
Base Case 10% capacity 10% decrease of 10% cc and -10%
increase margin margin

62
 Interpretation:-
In the above four cases the NPV is Rs 159 Lakhs, Rs. 118 Lakhs, Rs.92 lakhs and Rs. 50
lakhs respectively, which is gradually decreasing as we change in capacity and profit
margin of the firm.

CHAPTER- 5
Findings & Conclusions
FINDINGS

NPV:- NPV method is used to decide whether to accept the investment project. The project
will be accepted if the net present value is positive (NPV>0) and the project will be rejected
if the net present value is negative (NPV<0). Positive NPV contributes to the net wealth of
the shareholders, which should result in the increased price of a firm’s share. A project with
zero NPV (NPV=0) may be accepted. A zero NPV implies that project generates cash flows
at a rate just equal to the opportunity cost of capital.
 Accept the project when NPV is positive NPV>0
 Reject the project when NPV is negative NPV<0
 May accept the project when NPV is ZERO NPV=0

In all the above four cases, the NPV is positive, i.e. Rs. 159 lakhs, Rs. 118 lakhs, Rs. 92 lakhs
and Rs. 50 lakhs. So, the company can accept any one of these project. Hence, the company
should accept the project whose NPV is higher of all the cases.

IRR:- The internal rate of return (IRR) method is another discounted cash flow technique,
which takes account of the magnitude and timing of cash flows. Other terms used to describe
the IRR method are yield on an investment, marginal efficiency of capital, rate of return over
cost, time-adjusted rate of internal return and so on. The concept is quite simple to
understand in case of a one-period project. The rate of return depends on the project’s cash
flows, rather than any outside factor, therefore it is referred as INTERNAL RATE OF
RETURN.

63
In all the four cases, IRR is 29.57%, 26.61%, 25.74% and 22.93%. The benchmark of the
company is 25%. So, the company can accept any one project out of these which is above
25%.

MIRR: - The Modified Internal Rate of Return (MIRR) is a financial measure of an investment's

attractiveness. It is used in capital budgeting to rank alternative investments of equal size. As the
name implies, MIRR is a modification of the internal rate of return (IRR) and as such aims to
resolve some problems with the IRR.

In all the four cases, MIRR is 15.43%, 14.80%, 14.62% and 14.02%. So, the company can
accept any one project out of these four.
CONCLUSIONS

and is the only Indian company to rank 88 th in the Fortune "Global 500" listing. The oil concern
is administratively controlled by India's Ministry of Petroleum and Natural Gas, a government
entity that owns just over 90 percent of the firm. Since 1959, this refining, marketing, and
international trading company served the Indian state with the important task of reducing India's
dependence on foreign oil and thus conserving valuable foreign exchange. That changed in April
2002, however, when the Indian government deregulated its petroleum industry and ended Indian
Oil's monopoly on crude oil imports. The firm owns and operates seven of the 17 refineries in
India, controlling The Indian Oil Corporation Ltd. operates as the largest company in India in
terms of turnover nearly 40 percent of the country's refining capacity.

For my internship I was in Barauni Refinery, which is under Refinery division of Indian Oil
Corporation Limited. It was built in collaboration with Russia and Romania. Situated 125
kilometers from Patna, it was built with an initial cost of Rs 49.40 crore. Barauni Refinery was
commissioned in 1964 with a refining capacity of 1 Million Metric Tons per Annum (MMTPA)
and it was dedicated to the Nation by the then Union Minister for Petroleum, Prof. Humayun
Kabir in January 1965. After de-bottlenecking, revamping and expansion project, it's capacity
today is 6 MMTPA. Matching secondary processing facilities such ResidFluidised Catalytic
Cracker (RFCC), Diesel Hydro treating (DHDT), Sulphur Recovery Unit (SRU) have been
added. These state of the art eco-friendly technologies have enabled the refinery to produce
environment- friendly green fuels complying with international standards.
Barauni Refinery was initially designed to process low Sulphur crude oil (sweet crude) of
Assam. After establishment of other refineries in the Northeast, Assam crude is unavailable for
Barauni . Hence, sweet crude is being sourced from African, South East Asian and Middle East
countries like Nigeria, Iraq & Malaysia. The refinery receives crude oil by pipeline from Paradip
on the east coast via Haldia. With various revamps and expansion projects at Barauni Refinery,
capability for processing high-Sulphur crude has been added — high-Sulphur crude oil (sour
64
crude) is cheaper than low-Sulphur crudes — thereby increasing not only the capacity but also
the profitability of the refinery.

For investment decision making there are various tools available like NPV, IRR, ARR, PI
etc. In IOCL, company relies on IRR method for investment decision making. Since a
company should not rely only on one method, so IOCL should consider NPV also.

In this project report ATF tank Proposal was taken as investment project. There were four
options considered, in which option I is giving highest IRR of 29.57%.

In my point of view, OPTION –I is the best in available options, as it is giving highest return
on minimum investment.

CHAPTER -5

Suggestions

 In the base case the NPV is Rs. 159 lakhs, IRR is 29.57% and MIRR is 15.43% which is
more than the other four cases i.e. in 10% capacity increased case, 10% decrease in
margin and 10% capacity increase as well as 10% decrease in margin. Company should
choose the first option that is base case, because at the lowest investment it is giving the
highest Internal Rate of Return.

 While choosing the project, the firm should consider NPV, IRR and MIRR for
investment decisions. The firm should compare all of above three with the other project.
The project which has more NPV, IRR and MIRR than other projects should be chosen
as an investment and that one will be more profitable for the firm.

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REFERENCES

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