A SUMMER TRAINING PROJECT/A SUMMER TRAINING REPORT ON

“CAPITAL BUDGETING AT INDIAN OIL

CORPORATION LIMITED”

Submitted in the partial fulfillment for the award of Degree of

Bachelor in Commerce/ Degree of Bachelor in Business
Administration 2019-22

UNDER THE GUIDANCE: SUBMITTED BY:

Ms. Isha Goel GAURAV SINGH

Faculty (Management), CPJCHS Enrollment No. 04424201719

Batch (2019-22)

CHANDERPRABHU JAIN COLLEGE OF HIGHER STUDIES & SCHOOL OF LAW

An ISO 9001:2008 Certified Institute (Approved by the Govt. of NCT of Delhi
Affiliated to Guru Gobind Singh Indraprastha University, Delhi)

Plot No OCF Sector A-8, Narela New Delhi -40

1
]

DECLARATION

This is to certify that Report entitled CAPITAL BUDGETING AT ( IOCL)”which is submitted by

me in partial

fulfillment of the requirement for the award of degree B.Com (H) / BBA (G) to GGSIP University,

Dwarka, Delhi comprises only my original work and due acknowledgement has been made in the

text to all other material used.

18-10-2021 Gaurav singh

Date: Name and Signature of Student

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 A SUMMER INTERNSHIP PROJECT REPORT

ON

CAPITAL BUDGETING

AT

CERTIFICATE

This is to certify the GAURAV SINGH , a student of Bachelor of Commerce

BBA (G), Batch of 2019, Chanderprabhu Jain College of Higher Studies & School of Law, Affiliated to
GGSIP, University bearing Enrollment No 04424201719, has undertaken the Summer Internship
Training at INDIAN OIL CORPORATION LIMITED during 1-08-2021 to 30-08-2021 under my
supervision & guidance. He/ She has completed the Project on CAPITAL BUDGETING AT
FINANCE DEPARTMENT OF IOCL

30-08-2021 GAURAV SINGH

Date: Name and Signature of Concerned Person

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 Acknowledgement

I offer my sincere thanks and humble regards to Chanderprabhu Jain College of Higher Studies &
School of Law, GGSIP University, New Delhi for imparting us very valuable professional training
inB.Com (H)/BBA (G).
.
I pay my gratitude and sincere regards to Mr./ Ms. …………., my project Guide for giving me the
cream of his/her knowledge. I am thankful to him as he has been a constant source of advice,
motivation and inspiration. I am also thankful to him for giving his suggestions and
encouragement throughout the project work.

I take the opportunity to express my gratitude and thanks to our computer Lab staff and library
staff for providing me opportunity to utilize their resources for the completion of the project.

I am also thankful to my family and friends for constantly motivating me to complete the project
andproviding me an environment which enhanced my knowledge

GAURAV SINGH

Student’s Signature

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 Table of Contents

S NO. PARTICULARS PAGE NO.

CHAPTER 1
1. INTRODUCTION
2. PROFILE OF ORGANISATION

3. CORPORATE

4. STRUCTURE OF IOCL

5. HISTORY & PRODUCT PROFILE OF IOCL

6. BRANDED PRODUCTS OF IOCL

7. REFINERIES PIPELINE AND MARKETING SET

UP OF IOCL
CHAPTER 2 RESEARCH METHOLOGY

8. MISSIONS OBJECTIVES AND OBLIGATIONS OF

COMPANY
9. SWOT ANALYSIS OF IOCL

10. OBJECTIVE AND SCOPEOF THIS STUDY

11. MISSION OBJECTIVE AND GOAL OF FINACE

DEPARTMENT OF IOCL
12. FINANCE DIVISION

13. INTRODUCTION OF CAPITAL BUDGETING

14. CAPITAL BUDETING AT IOCL

15. INTRODUCTION OF INDUSTRY PERFORMS

CAPITAL BUDGETING

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 16. OBJECTIVE, PROJECT COST, OPERATING COST

17. NEED & ANALYSIS

18. PHASHING OF EXPENDITURE

19. FINDINGS

CHAPTER 3 ANALYSIS AND INTERPRETATION OF DATA

20. FINANCIAL ANALYSIS

CHAPTER 4 CONCLUSIONS AND RECOMMENDATIONS

21. RECOMMENDATIONS

22. BIBLOGRAPHY

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 Chapter 1
Introduction

7
 INTRODUCTION

In today’s era of globalization and competition, coping up with technological

advancement, which is undergoing evolution at a very fast rate, holds the key to the
survival and growth of any organization. Installing technology, well-equipped
facilities or going for modification in the existing ones are the means to attain better
performance efficiency and hence further the value addition.

Indian oil, the largest commercial enterprise of India (by sales turnover) is India’s sole
representative in fortunes prestigious listing of world’s 500 largest corporations,
ranked 116th for the year 2008. To maintain strategic edge in the market place, Indian
oil has given importance to capital budgeting because capital investment decisions
often represent the most important decisions taken by an organization, and they are
extremely important, they sometimes also pose difficulties.

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 INTRODUCTION OF THE COMPANY

HISTORY OF INDIAN OIL CORPORATION LTD.

After the Indian Independence, the Oil Industry in India was a very small one in size
and Oil wasproduced mainly from Assam and the total amount of Oil production was not
more than 250,000tones per year.This small amount of production made the oil experts from
different countries predict the futureof the oil industry as a dull one and also doubted India's
ability to search for new oil reserves.But the Government of India declared the Oil industry in
India as the core sector industry underthe Industrial Policy Resolution bill in the year 1954,
which helped the Oil Industry in India vastly.

Oil exploration and production in India is done by companies like NOC or National Oil
Corporation, ONGC or Oil and Natural Gas Corporation and OIL who are actually the oil
companies in India that are owned by the government under the Industrial Policy Rule. The
National Oil Corporation during the 1970s used to produce and supply more than 70 percent o

the domestic need for the petroleum but by the end of this amount dropped to near
about 35 percent. This was because the demand on the one handincreasing at a good
rate and the production was declining in a steady rate.
Oil Industry in India during the year 2004-2005 fulfilled most of demand through
importing oil from multiple oil producing countries. The Oil Industry in India itself
produced nearly 35 million metric tons of Oil from the year 2001 to 2005. The Import
that is done by the Oil Industry in India comes mostly from the Middle East Asia.
The Oil that is produced by the Oil Industry in India provides more than 35 percent of
the energy that is primarily consumed by the people of India. This amount is expected
to grow further with both economic and overall growth in terms of production as well
as percentage. The demand for oil is predicted to go higher and higher with every
passing decade and is expected to reach an amount of nearly 250 million metric ton
by the year 2024.

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 CORPORATE

Indian Oil, the largest commercial enterprise of India (by sales turnover), is India’s sole
representative in fortune’s prestigious listing of the worlds 500 largest corporations, ranked
116th for the year 2008. It is also the 21st largest petroleum company in the world and the
# 1 petroleum trading companies among the national oil companies in the Asia-Pacific
region.

INDIA’S FLAGSHIP NATIONAL OIL COMPANY

Incorporated in 1959 as Indian Oil Company Ltd., it became a Corporation on 1 st September

1964, when Indian Refineries Limited (Est. 1958) was merged with the company. As India’s
flagship national oil company, Indian oil accounts for 56% petroleum products market share,
42% national refining capacity and 69% downstream pipeline throughput capacity.

Indian Oil is an “academy” company with a source of full-fledged training centers across the
country building competency, confidence and capability to face the challenges of the market
place. Among these, IIPM (the Indian oil institute of petroleum management) at Gurgaon, the
Indian oil management centre for learning at Mumbai, and the Indian oil management
academy at Haldia have emerged as world-class training and management academies.

REFINERIES

The Indian Oil Group of companies owns and operates 10 of India’s 18

refineries,(Digboi, Guwahati, Barauni,Gujarat,Haldia, Mathura, Panipat ) with a combined

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refining capacity of 60.20 million metric tones per annum (MMTPA) or (1.2 million barrels
per day).These include two refineries of subsidiary Chennai Petroleum Corporation Ltd.
(CPCL) and one of Bongaigaon Refinery and Petrochemicals Limited (BRPL). Indian Oil
owns and operates the country’s largest network of cross-country crude oil and product
pipelines spanning nearly 9,000 kilometers, with a combined capacity of 60.42 MMTPA.
Indian Oil and its subsidiaries account for 44.50% petroleum products market share among
public sector oil companies, 42% national refining capacity and 69% downstream pipeline
throughput capacity.

PIPELINES

Indian oil owns and operates India’s largest network of cross-country crude oil and
product pipelines of 9000 Kms. With a combined capacity of 60.42 MMTPA. Indian oil also
operates 2 single Buoy Mooring systems in the high seas off Vadinar coast in the Gulf of
Kutch for receipt of crude oil. Indian oil owns and operates 69% downstream pipeline
throughput capacity.

MARKETING

` Indian oil’s country wide network of over 21000 retail sales points is backed for
supplies for its extensive, will spread out marketing infrastructure comprising 169 bulk

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storage terminals, installation and depots, 93 aviation fuel stations and 79 LPG bottling
plants. Its subsidiary, IBP company Ltd, is a stand alone marketing company with a nation
wide retail network of over 2500 Sales points. Indian oil caters to over 53% of India’s
petroleum consumption. Indian oil’s vast distribution network of over 21000 sales points
ensures that essential petroleum products reach the customer at the

“RIGHT PLACE AND THE RIGHT TIME”

The 17th largest petroleum company in the world, Indian oil, is well on its way to becoming
an integrated, transnational Energy Corporate. Indian oil touches every customers heart by
keeping the vital oil supply line operating relentlessly in nooks and corners of India that’s
why wherever you go must find an Indian oil because it lives in every part, every region of
India from Kashmir to Kanya kumari and from Gujarat to Bay of Bengal.

IOCL STRUCTURE

Indian Oil carries its activities through its five divisions namely:

1) Refinery Division

2) Pipe Line Division

3) Marketing Division

4) Assam Oil Division

5) Research and Development Division

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13
 HISTORY

Indian refineries indian oil

company LTD.

LTD. 1958

1958 MERGE 1958

Indian oil corporation LTD.

1 september 1964

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PRODUCTS PROFILE (IOCL)

Class A
1. The Products produced by IOCL are broadly classified into the following cases:
Liquid Petroleum Gas (L.P.G)

Class B:
2. Motor Spirit (M.S.)/Gasoline
3. Super Kerosene Oil (S.K.O)
4. High Speed Diesel Oil (H.S.D)

Class C :
5. High Speed Diesel Oil (H.S.D)

6. Furnace Oil (F.O.)

7. Bitumen
8. Naphtha
9. Aviation Turbine Fuel (A.T.F)

Class D :
10. Mineral Turpentine Oil (M.T.O)
11. Jute Batching Oil (J.B.O)
12. Light Diesel Oil (L.D.O)
13. Unleaded petroleum
14. Lubes & Greases
15. Fuel & Feedstock
16. Super Kerosene Oil

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16
REFNERIES PIPELINES & MARKETING SET-UP OF
IOCL

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18
 Chapter 2
Research Methodology

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MISSION OBJECTIVES AND OBLIGATIONS OF THE
COMPANY

MISSIONS

 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.

 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 strong environment conscience.

OBJECTIVES

 To serve the national interest in the oil and related sectors in accordance and
consistent with government policies.

 To ensure and maintain continuous and smooth supplies of petroleum products by

way of crude Refining, Transportation and marketing activities and to provide
appropriate assistance to the consumer to conserve and use petroleum product
efficiently.

 To earn a reasonable rate of interest on investment.

 To work towards the achievement to self-sufficiency in the field of oil refining by

setting up adequate capacity and to build up expertise in lying of crude oil and
petroleum product pipelines.

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  To create a strong research and development base in the field of oil refining and
stimulate the development of new product formulations with a view to
minimize/eliminate their imports and to have next generation products.

 To maximize utilization of the existing facilities in order to improve efficiency and

increase productivity.

 To optimize utilization of its refining capacity and maximize distillate yields from
refining of crude oil to minimize foreign exchange to outgo.

 To minimize fuel consumption in refineries and stock losses in marketing operations

to effect energy conservation.

 To further enhance distribution network for providing assured service to customers

throughout the country through expansion of reseller network as per marketing
plan/government approval.

 To avail of all viable opportunities, both national and global, arising out of the
liberalization policies being pursued by the Government of India.

 To achieve higher growth through integration, mergers, acquisitions and

diversification by harnessing new business opportunities like petrochemicals, power,
lube business, consultancy abroad and exploration and production.

OBLIGATIONS

Towards customers and dealers

 To provide prompt, courteous and efficient service and quality products at fair and
reasonable price.

Towards suppliers

 To ensure prompt dealing with integrity, impartiality and courtesy and promote
ancillary industries.

Towards employees

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  Develop their capability and advancement through appropriate training and career
planning, expeditious redressal of grievances.

Expeditious redressal of grievances

 Fair dealing with recognized representatives of employees in pursuance of healthy

trade union practice and sound personnel policies.

Towards community

 To develop techno economically viable and environment friendly products for the
benefit of the people.

 To encourage progressive indigenous manufacture of products and materials so as to

substitute imports.

 To ensure safety in operations and highest standards of environment protection in its

manufacturing plants and townships by taking suitable and effective measures.

Towards defense services

 To maintain adequate supplies for defense services during normal and emergency
situations as per their requirements at different locations.

Values
Care stands for: - Innovation stands for: -
Empathy Creativity
Understanding Ability to learn/absorb
Co-operation Flexibility
Empowerment Change

Passion stands for: - Trust stands for: -

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

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SWOT Analysis of IOCL

 Strong Network: With a large distribution network of 10,000 distributors,

IndianOil has a brand of LPG cooking gas called Indane that serves 12 crore
households. With the brand Servo, it is a market leader in the lubrication industry.
Every day, 1,750 planes are powered by the company’s 107 aviation fuel systems.
IOCL is one of India’s top brands. The firm was named one of India’s “Most
Trusted Brands” in the “Gasoline” category by Reader’s Digest-AC Nielsen
Survey. The firm has lived true to the brand’s goal by pledging to cultivate
customer relationships, innovate, harness technology, and care for the environment
and the community.

 Pipeline Network: The corporation owns and operates 13,400 kilometers of

cross-country pipelines that transport crude oil, processed petroleum products, and
natural gas. The business just completed the installation of 543 kilometers of new
pipeline sections. The company owns and administers two SPM terminals in
Vadinnar’s high seas, as well as three more SPMSingle-Point Mooring
(SPM) terminals in Paradip that are used to moor pipeline systems that transport
crude oil from ocean tankers to onshore tank farms. The corporation operates crude
oil tank farms with massive capacities, ensuring seamless onward transfer to
refineries through pipelines.

 State of Art Research and Development Facility: IOCL has the most
advanced R&D facility. It has conducted pioneering research in the fields of
lubricants, pipelines, refineries, alternative fuels, engine testing, and environmental
sciences. In India and other countries, the business holds 554 patents. The research
and development facility is located on a vast 65-acre complex in Faridabad, India.
The center has been successful in developing technological solutions that are cost-
effective, socially responsible, and ecologically friendly. IOCL focuses on cutting-
edge research in nanotechnology, polymers, coal gasification, and petrochemicals,
and polymers and petrochemicals.

 Focus on Sustainability: The corporation has long believed in sustainability

and was an early investor in renewable energy sources, amassing a 200-MW
portfolio of solar and wind generating capacity that is quickly expanding. Under
the government’s Swachh Bharat Abhiyan, IOCL is investing in and researching
many waste-to-energy solutions. IOCL is also the industry leader in transforming
the retail network to run on solar energy, with almost one-third of its gasoline
stations using solar power. The majority of the company’s efforts are aimed at
making its operations more environmentally friendly, with the goal of reducing its
water and carbon footprints by 20% and 18%, respectively.

 Strong Brand Portfolio: Over the years, IOCL has made significant
investments in developing a strong brand portfolio. This is reinforced by IOCL’s

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 SWOT analysis. If the company wishes to grow into other product categories, this
brand portfolio may be quite beneficial.

 Effective Go To Market Strategy: Its Go To Market techniques for its

products have been extremely effective.

 Good Training Programmes: Successful training and learning programmes

have resulted in a highly competent workforce. IOCL invests heavily in employee
training and development, resulting in a team that is not just highly competent but
also driven to achieve more.

Weakness in the SWOT Analysis of IOCL – IOCL SWOT Analysis

 Tough Competition: Reliance Industries, ONGC, Hindustan Petroleum,

and Bharat Petroleum are IOCL’s key competitors. Bharat Petroleum, another
major rival of IOCL, has invested in different R&D initiatives. It also operates
huge refineries in Mumbai and Cochin and is a Fortune 500 company. To keep
ahead of the competition and avoid losing market share, IOCL must make strategic
decisions and investments.

 Government Control: IOCL has suffered significant losses as a result of the

government’s management of gasoline pricing policy because the center frequently
fails to follow its commitments to keep gasoline costs artificially low. The
corporation continues to borrow more and spend more in order to assure constant
fuel supply to consumers, but growing interest costs slash their profit, limiting
their capacity to drive the new project to modernize.

 Need more investment in new technologies: Given the scale of expansion

and different geographies the company is planning to expand into, IOCL needs to
put more money in technology to integrate the processes across the board. Right
now the investment in technologies is not at par with the vision of the company.

Opportunities in the SWOT Analysis of IOCL – IOCL SWOT Analysis

 Growing Business and Demand: IOCL’s primary business has been

transportation and distribution of petroleum products, as well as refining and other
related activities, in response to India’s expanding need for fuel. Over the years,
the firm has extended its activities throughout the hydrocarbon value chain,
including oil and gas exploration, as well as diversification into natural and
alternative energy sources.

 Market Expansion: IOCL has been steadily extending its business

worldwide, with offices in the UAE, Bangladesh, Myanmar, Mauritius, Singapore,
and the United States. The company has also expanded its operations through
collaborative partnerships with reputable partners from both outside and India.

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 Ratnagiri Refinery and Petrochemicals Ltd. was formed as a joint venture between
BPCL and HPCL. The company is performing incredibly well in the international
market and has been able to create several chances for the organization.

 Increasing natural gas market: Natural gas is developing as a cleaner

alternative to fossil fuels, and the government of India is pushing for a gas-based
economy and measures to utilize it across industries. IOCL obtains liquefied
natural gas (LNG) from overseas suppliers with whom it has a long-term contract.
Currently, IOCL distributes LNG to 58 institutional clients in the electricity,
fertilizer, steel, and industrial sectors.

Threats in the SWOT Analysis of IOCL – IOCL SWOT Analysis

 Government Policies and Regulations: The government’s decision to

provide citizens with relief from rising gasoline costs resulted in massive losses for
the corporation. Companies such as IOCL, BPCL (Bharat Petroleum Corp. Ltd),
and HPCL (Hindustan Petroleum Corp. Ltd) were predicted to lose Rs. 9000 crore
in net profit. Certain government actions to reduce fuel and diesel prices have a
significant impact on the company’s earnings

 Economic Conditions: The corporation is dealing with a number of issues

relating to rising oil costs, currency fluctuations, and growing worries about air
pollution. The company’s goal and primary strategy are to address the difficulties
and possibilities given by environmental circumstances, as well as to integrate and
diversify activities across its worldwide business. In such uncertain conditions, the
company’s effort to reduce costs across the supply chain is a monumental
challenge.

 Liability Laws: Liability laws in different countries are different and XYZ
may be exposed to various liability claims given change in policies in those
markets.

 Currency Fluctuations: As the company is operating in numerous countries

it is exposed to currency fluctuations especially given the volatile political climate
in a number of markets across the world.

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 OBJECTIVE OF DOING THIS PROJECT

To know about the practical implication of Finance function in any organization as an

BBA student. While pursuing this project in IOCL, our main objective was to gain an
idea about the workings of Finance Department as a whole.

SCOPE OF STUDY

Due to the paucity of time available, we could only get an overview of the topics of
our interest area and not a detail analysis. Further, our study was limited to (IOCL)
and its Financial Department only. All our study is based on the latest information
available and not on the basis of past records.

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 MISSION, OBJECTIVE AND GOAL OF FINANCE
DEPARTMENT

A) FINANCIAL MISSION

1) To provide high quality financial staff support for decision making and control
to all levels of management, corporate, divisional unit and location to enable the
achievement to overall corporate objectives and goals.

2) To play a lead role in scanning the domestic and international financial

environment, the formulation and implementation of all financial policies and
plans for different time spans consistent with and conducive to the business plan
for expansion, diversification, productivity etc…

3) To interact pro-actively with the relevant government agencies on pricing and

investment and with financial institutions, depositors and creditors, with
sensitivity and promptness for mobilization and provision of funds for
uninterrupted operations and project execution at optimal costs.

4) To maintain, review and update all relevant accounting records, systems and
procedures for discharging the fiduciary responsibilities and enabling compliance
with statutory obligations.

5) To inculcate financial awareness, costs benefit attitudes and system orientation

in the entire organization.

6) To develop the human resources, system and techniques of finance for

continuing innovation and contribution towards IOC corporate excellence.

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 a. FINANCIAL OBJECTIVES To ensure adequate return on capital employed
and maintain a reasonable annual dividend on its equity capital.
1) To ensure maximum economy in expenditure.

2) To generate sufficient internal resources for financing partly/wholly

expenditure on new capital projects.

3) To develop long term corporate plans to provide adequate growth of the

activities of the corporation.

4) To continue to make an effort in bringing reduction in the cost of production

of petroleum products by means of systematic cost control measures.

5) The Endeavor to complete all plan projects within stipulated time and within
stipulated cost estimate.

(C) FINANCIAL GOALS

1) To inculcate cost consciousness in user departments.

2) Development of Standard Refining cost at each unit level.

3) Proper implementation of budgetary control and submission of MIS in time.

4) To keep the level of inventories below the level fixed by the Board and
outstanding debts, loans, advances and claim at bare minimum.

5) To ensure payment on due date to various agencies.

6) Monitor capital expenditure to ensure completion within stipulated time and

cost.

7) Optimize utilization of working capital efficient management of funds.

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 SECTION WISE SEGREGATION IN REFINERY’S

FINANCE DIVISION

A-1: MAIN ACCOUNTS

Cash budget is prepared in this section and the same is to be produced before HO. All
other section of finance department provides the information to A-1 section for
preparing list “B”. List “B” details include 20 items approximately. Some of them are
mentioned below.

 Employment and Housing accommodation statistics.

 Payment of sales tax, Excise duty, Entry tax and other tax and duties.

 Loss on disposal/write-off of –

(a) Assets

(b) Stores and spares showing original cost, book value and reason
for disposal of each item under various categories.

 Details of staff welfare expenses etc.

Asset management is controlled by A-1 section. For assets management, they prepare
the master of assets, which includes name, cost centre and other details for
capitalization of assets. Further, receiving debit, credit notes and reconciliation also
form a part of this section.

A-2: PURCHASE

Generally A-2 section deals with the payment of purchase items only. After purchase,
the material is kept into stores. Store Department makes Goods Receipt Vouchers
(GRV) and sends it to the purchase i.e. A-2 section. Here the GRV is checked with
the purchase order (PO) and payment is made on its basis.

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Section dealing with purchases is responsible for

 Scrutiny & concurrence of purchase proposals

 Deposits and advance payment to suppliers.

 Passing of bill for supplies received.

 Pricing of goods receipts notes.

 Accounting of cash purchases made by the materials department.

 Arrangement for insurance of transit risk.

 Maintenance of books of accounts.

 Sales tax matters.

A-3: WORKS

A/3 work section mainly deals with payment or running contracts. Its considers only
plants maintenance, roads, painting, welding, water etc. First and final payments are
made on the basis of work completion.

A-4: PAYROLL

This section mainly deals with the payment to employees for their work. Rules for
pay and allowance are prescribed by head office from time to time. The eligibility for
special type of allowance such as special allowances, shift allowance etc. is
determined by personnel department and intimations and sent to the finance
department for employees eligible for such allowance.

Function dealing with this section can be broadly classified as:

 Scrutiny & concurrence of proposals from personnel department.

 Payment of salaries and allowances.

 Advances to employees.

 Deductions from pay bills.

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  Other welfare schemes including gratuity.

 Personal claims and other payments.

 Statutory and statistical requirements.

A-4 also maintains the data to transfer and new recruitment of persons and adds it to
master information. If a person is transferred to another unit, the LPC (last pay
certificate) is required to be added into master information.

A-5: STORES AND MODVAT

MODVAT stands for Modified Value Added Tax, which is now known as CENVAT
i.e. Central Value Added Tax. It is a scheme, which provides relief to final
manufacturers on the excise duty borne by the suppliers in respect of goods
manufactured by them. Under this scheme, a manufacturer can take credit of excise
duty paid on raw materials and components used by him. The normal excise duty rate
is 16%. However it depends upon the Tariff class under which the product is
classified.

The section dealing with accounting of stores shall have the following functions:

 Passing and accounting of transportation bills.

 Accounting of receipts, issues, return and transfer of materials.

 Accounting of imported materials for capital works and operations/

maintenance.

 Stock verification.

 Accounting for sale of surplus materials.

A-6: TA/LTC/MEDICAL

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This section maintains in-transfer and out-transfers accounting for claim settlement
and also handles the bill payment of official tour of employees. HO. Claim of Leave
Travel Concession (LTC) controls all foreign tours; this section also deals encashment
of LTC and medical payment.

A-7: MISCELLANEOUS SECTION

The function of the Miscellaneous Section includes the following:

1. Accounting of cash imp rest and advances for company expenses;

2. Passing of bills of miscellaneous nature

3. Miscellaneous recoveries from outsiders

4. Inter-sectional coordination.

A-8: PRODUCTION ACCOUNTING

This section maintains production accounts, including crude accounting, custom duty
payments, product bill accounts, bitumen drum accounts and stock valuation
accounts. A-8 Keeps records of input in terms of crude oil and output in terms of the
company’s final products.

The basis functions of the production accounts are:

 Crude oil quantity and value accounting for the receipts, consumption and
stock.

 Accounting of inter-divisional/ inter-unit transfer of products for ex-refinery

value and excise duty.

 Accounting of consumptions of own fuel/products.

 Maintenance of pool accounts and audit thereof.

 Value of stocks

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  Costing.

A-9: CASH / BANK

This section mainly deals with making payments. No fixed limit is established by the
organization for making payments. The organization has special current accounts with
State Bank of India. These accounts are the sources of payments. The balance at the
end of the day, becomes nil by transferring the amount to the head office. The
employees of the organization are paid through cash up to Rs.20000 and by cheque
for over and above Rs. 20000.

Perks such as TA, LTC and medical. Salary, on the other hand, is paid through
cheques.

Cash section shall be responsible for:

 Receipts of cash, cheques and bank drafts

 Payment of cash, cheques and bank drafts.

 Handling of bank deposits/ with drawls, custody of cash and transfer of funds.

 Security arrangement for cash handling.

 Safe custody of valuables and documents.

 Petty cash imprest.

 Maintenance of subsidiary cash credit account and special current account.

A-10 & A-11: PROJECT (WORKS) & PROJECT (PURCHASE)

These sections deal with payment regarding capital expenses. In case of project
(Works), Services Entry Sheet is an important document to be produced by the in-
charge engineer.

A-12: PF & ADVANCES

34
The scheme of the provident fund is the same as in case of any government
undertaking i.e. 12% of the dearness allowance is kept aside for this purpose and the
company contributes the same amount. All the employees irrespective of their
position in the organization are entitled to 9.5% interest on provident fund. This rule
is applied uniformly to all the units and branches of the refineries division of Indian
Oil Corporation limited.

A-13: OIL ACCOUNT

Here are some basic functions of the oil accounting:

 Accounting of crude oil receipts

 Accounting of customs duty on crude oil

 Accounting of finished product receipts

 Dispatch of products;

 Excise procedure and accounting

 Material balance & Production statistics.

35
 INTRODUCTION OF CAPITAL BUDGETING

The basic characteristic of a capital expenditure is that it generally involves the current outlay
or near future outlay of funds expected to yield a flow of benefits in future. The benefits may
be monetary or non-monetary. A capital expenditure, from the accounting view point, is an
expenditure, which is shown as an asset in the balance sheet. This asset, except in case of non
–depreciable asset like land, is depreciated over its life.

“CAPITAL BUDGETING IS THE PROCESS BY WHICH FIRM DECIDES WHICH

LONG TERM INVESTMENT TO MAKE.” The decision to accept or reject a capital
budgeting project depends on an analysis of the cash flows generated by the project and its
cost. Due to capital budgeting one can know about the risk and return of the project also the
viability and feasibility of the project by doing different analysis. So in today’s world for any
company capital budgeting becomes necessary, because of long-term effects, irreversibility of
the investment, substantial outlays, uncertainty about future, etc.

In this large commercial organization we could get kind support of every person of finance
department and got experience of making capital investment decisions. We have tried to put
here by this project that how this company decides on investments, how the capital budgeting
process can be done and what are the important aspects of capital budgeting that should be
considered in depth and for that what type of analysis is done. So we have also put here one
sample proposal or project, to give an idea about how different analysis can be done, making
decision and how an investment proposal translates into a concrete project.

IMPORTANCE

Capital expenditure decision often represents the most important decisions taken by an
organization. Their importance stems from 3 inter related reasons.

1) Long term effects - The consequences of capital expenditure decisions extend far
into the future. Current capital expenditure decisions provided the framework for
future activities.

36
 2) Irreversibility - A wrong capital investment decision often cannot be reversed
without incurring substantial loss.

3) Substantial outlay - Capital expenditures usually involves substantial outlays.

DIFFICULTIES

While capital expenditure decision is extremely important, they also pose difficulties. These
difficulties stem from 3 principle sources given below:

1) Measurement problems - Measuring the costs and benefits of a capital expenditure

proposal is difficult, particularly when they are somewhat intangible in nature.

2) Uncertainty - The benefits of capital expenditure decision occur in the future. The
future is characterized by uncertainty. Hence analysis of capital expenditure proposal
is difficult.

3) Temporal spread - The costs and benefits relating to capital expenditure proposal
occur at different points of time. A rupee received now is not the same as received a
year hence.

CAPITAL BUDGETING

“Capital Budgeting is the process by which the firm decides which long-term investments to
make.” Capital budgeting projects, i.e., potential long-term investments, are expected to
generate cash flows over several years. The decision to accept or reject a Capital Budgeting
project depends on an analysis of the cash flows generated by the project and its cost. The
following four capital budgeting decision rules or tools are considered for measuring financial
feasibility of project:

 Payback period

 Average Rate of Return (ARR)

 Net Present Value (NPV)

 Internal Rate of Return (IRR)

37
A Capital Budgeting decision rule should satisfy the following criteria:

 Must consider all of the project’s cash flow.

 Must consider the Time Value of Money.

 Must always lead to the correct decision when choosing among Mutually Exclusive
Projects.

PHASES OF CAPITAL BUDGETING:

Capital budgeting is a complex process, which may be divided into the following phases:

1. The capital budgeting process begins with the identification of potential investment
opportunities. The planning body develops estimates of future sales that serve as the basis for
setting production targets which in turn, is helpful in identifying required investment in plant
and equipment

2. A system of rupee gateways usually characterizes capital investment decision-making.

Under this system executives are vested with the power to okay investment proposals up to
certain limits.

3. Before undertaking projects involving larger outlays are usually required an appropriation
orders. The purpose of this check is mainly to ensure that the funds position of the firm is
satisfactory at the time of implementation.

4. Translating an investment proposal to a concrete project is a complex, time-consuming, and

risk-fraught task. Delays in implementation, which common, can lead to substantial cost
overruns for that the following are helpful. (1) Adequate Formulation of Projects, (2) Use of
the principal for responsibility Accounting, (3) Use of Network techniques.

5. Performance review is a means for comparing actual performance with projected

performance. It is useful in several ways; (1) it throws light on how realistic were the
assumptions underlying the project. (2) It provides a documented log of experience that is
highly valuable for decision making. (3) It helps in uncovering judgmental biases. (4) It
includes a desired caution among the project sponsors.

38
PROJECT DEVELOPMENT CYCLE:

The development cycle consists of three broad phases:

1. Pre investment phase which consists of several stage of identification of investment

opportunity, preliminary analysis, feasibility study, and decision-making.

2. Implementation phase involves setting up of manufacturing facilities, consists of

several stages (1) project and engineering design, (2) negotiation and contracting,(3)
construction, (4) training ,(5) plant and commissioning.

3. Operational phase is the longest phase in terms of time span begins with the project
commissioned and ends with the project wound up.

 Aspects of Appraisal:

Broadly four types of appraisal may be conducted while evaluating an investment proposal:

(1) Market appraisal requires a wide variety of information and appropriate forecasting
methods.

(2) Technical appraisal needs to determine with respect to location, size, process, etc.

(3) Financial appraisal seek to ascertain whether the project will be financially viable or not
with respect to servicing debt and return expectations.

(4) Economic appraisal concerned with judging a project with respect to social cost and
benefits

of project to the firm in non-monetary terms.

Basic considerations are Risk and Return factors of financial analysis. Higher the return,
ceteris paribus, higher the market value, higher the risk, ceteris pair bus, lowers the marke
value. In financial analysis the trade-off between risk and return needs to be carefully
analyzed.

 Market and Technical Appraisal:

39
Before a detailed study of a project is undertaken, it is necessary to know, the types of
information regarding size of market because viability of the project depends upon the level
of sales exceeds a certain volume. The information for this purpose can be gathered from past
record of demand and present, breakdown of demand, price statistics, methods of distribution,
and government policy by primary sources and secondary sources.

Technical analysis is concerned primarily with materials and inputs, production technology,
plant capacity, location and site, machinery and equipment, structures and civil works,
projects charts and layouts and work schedule. An important aspect of technical analysis is
concerned with defining the materials and inputs require to proximity to raw materials and
markets, availability of infrastructure facilities and other factors.

FINANCIAL ESTIMATES AND PROJECTIONS:

 Costs and benefits from the financial angle:

In defining the costs and benefits of a capital expenditure proposal from financial angle the
following principles must be borne in mind: cash flow principle, post-tax principle,
incremental principle. Cash flow associated with a project may be divided into three parts:
initial flow, operational flows, and terminal flows. When a project is viewed from the total
funds points of view, the net cash flow operation and winding up is the cash flow left after
meeting all expenses.

 Time value of money:

Money has time value. A rupee today is more valuable than a rupee a year hence. There are
different aspects of equations by which we can calculate the future value of money they are
Annuity, Differed annuity, Perpetuity, Annuity due, present value etc.

 Appraisal criteria:

There are two broad categories of appraisal criteria: non-discounting and discounting criteria.
The non-discounting criteria are: urgency, payback period, accounting rate of return, an debt
service coverage ratio, while discounting criteria are: net present value; benefit cost ratio,
internal rate of return and capital charge.

40
According to the urgency criteria, projects, which are deemed to be more urgent, get priority
over project, which are regarded as less urgent. The payback period represents the amount of
time that it takes for a capital budgeting project to recover its initial cost. The use of payback
period specifies that all independent projects with a pay back period less than a specified
number of years should be accepted.

The Internal Rate of Return of a capital budgeting project is the discount rate at which the Net
Present Value of a project equals zero. Projects with an IRR greater than the cost of capital
should be accepted. Average rate of return is a measure of profitability, which relates income
to investment, so a project is deemed to accept if ARR exceeds a certain cut off rate of return,
the net present value of a project is equal to the sum of the present value of all the cash flows
associated with the project. A wide variety of measures are used in practice for appraising
investment but most commonly used method for small size investment is payback period and
for large investment ARR and discounted cash flow methods.

 Cost of capital:

The firms cost of capital is the discount rate, which should be used in capital budgeting, the
cost of capital reflects the firm’s cost of obtaining capital to invest in long term assets. Thus it
reflects a weighted average of the firm’s cost of debt, cost of preferred stock and cost of
common stock.

 Risk analysis:

Risk analysis of capital investment is one of the most complex controversial and slippery
areas in finance, risk refers to variability, several measures of variability have been used to
denote risk like Mean, Standard Deviation, Coefficient of variation etc, the methods of risk
analysis commonly used in practice are: (1) conservative estimation of revenues, (2) safety
margin in cost figures, (3) flexible investment yardsticks, (4) acceptable overall certainty
index. The analysis of risk factor in practice can be improved if the profitability distribution
of the key factors underlying an investment project is developed and information is
communicated in this form.

41
 CAPITAL BUDGETING PRINCIPLES AND PRACTICES IN
IOCL

TYPES OF PLANS/ BUDGET:

The corporate objective, as approved by the board of Directors, forms the basis of long term/
short-term budgets so as to obtain the desired objectives.

LONG TERM PLAN

 PERSPECTIVE PLANS

Perspective plans covers duration of 10 to 15 years. This plan sets the long term goals
to be attained by the corporation in line with the corporate objectives. The corporate
objectives are further divided into divisional goals and unit goals. The purpose of
perspective goals is to achieve efficiency and supremacy in the existing operations
and also to diversify into other areas of operations as may be possible taking into
account the opportunities thrown by the environment. The perspective plan is updated
once in 2 years so that at any point of time, perspective for a period of 10 to 15 years
is available. The corporate planning department based on the inputs received by the
divisions prepares the perspective plan.

 LONG RANGE PLAN

Long range plan covers duration of 5 years. Long range planning is aimed to achieve
the broad objectives envisaged in the perspective plan by fixing specific targets and
action plans for various functions. The long range planning department at all units
and HO coordinates the long-range plan and the same is updated every year so as to
have a detailed plan for 5 years at any point of time. The targets set in the long-range
plan are reviewed periodically at units/ HO with reference to actual performance.

SHORT TERM PLANS

In the short term the corporation prepares revenue and capital budgets indicating the revised
estimates for the current year and the budget estimate for the next year. These budgets are

42
more detailed and indicate the expected physical/ financial performance of operations and
projects for close monitoring and control. In addition to these budgets, the purchase budget,
the working capital/ cash budget are also prepared to know the position of availability of
internal resources for financing projects and for further funds management in case of surplus/
deficit. The foreign exchange budget is also prepared for submission to the government our
requirements of foreign exchange.

CAPITAL BUDGETING AT IOCL

The capital budget is a plan of expenditure over a period of time on a chosen set of projects,
which results in acquisition of assets to the corporation and helps in generating income over a
period of years in future. Such projects are expected to generate income and improve
efficiency over a period of time in future.

The capital budget plays a very vital role for the growth and financial health of any
organization. it is necessary to continuously update the technology, removal of operational
bottlenecks, and improvement in efficiency and productivity, enhancement of capacities ,
fulfillment of social objectives, etc..

The quality of investment and success of project in regard to its fulfillment of objectives,
depend largely on the quality and content of the proposals seeking approval for capital
investment. Further, the proposal seeking approval of the board are emanating from the
different departments of the units. It may be possible that these different departments are
making different, even conflicting assumptions and exercising different degrees of care while
formulating capital budgeting proposals. In view of above it is imperative that a central group
at the corporate office subjects capital investment decision seeking approval of the board to
an overall, impartial and scientific appraisal. The primary function of this group is to appraise
all capital investment proposals seeking approval of the board.

The foremost issue that need to be described in the capital budgeting process pertains to
identification of basic objective or need which is sought to be fulfilled by implementation of
proposed project. The proposal shall present the complete prospective, rational and
background of need for project.

The need for the project may be broadly justified on account of:

43
 Technical / operational necessity

 Improvement in existing operations through removal of constrains/ updating of

technology.

 Capacity enhancement due to demand and supply imbalances.

 Investment on account of government/ strategic policy decisions

 Investment on account of marketing considerations.

 Safety/environmental and statutory requirements.

The financial analysis in capital budgeting is a vital for accessing the viability of each
non plans scheme ( encompassing wide spectrum of activities covering safety, statutory
requirements technology up gradation etc.) and hence provides valuable information to
the top management. Financial analysis produces an estimate for the financial gains,
which will accrue to the corporation after the implementation of scheme. The financial
analysis entails determination of year wise cash flows of the project, computation of
internal rate of return (IRR), each scheme is financially evaluated.

The budgeting in Mathura Refinery follows the Zero Base Budgeting (ZBB) concept in
which each requirement is required to be justified after evaluating al the possible
alternatives and ranking them in order of importance by systematic analysis. The
allocation of funds is not to be on the basis of the same activity being carried in the past.
In this process, the objectives are to be established with alternative ways of achieving
these objectives and carrying out the cost benefit analysis and ascertaining the
consequences of disapproval.

44
 CLASSIFICATION OF CAPITAL BUDGET

In IOCL, capital budget is classified in 2 categories:

 Plan schemes

 Non- plan schemes viz. Additional Facilities (AF)

PLAN SCHEMES:

Plan schemes are those schemes which are required to be included in the annual plan
documents for submission to Government / Planning Commission for approvals. These
schemes ultimately form part of the government’s annual plan. they are important from
national point of view and involve substantial expenditure, generally above 100 crores on
items relating to capacity improvement of primary or secondary units. While non-plan
schemes generally cover capital investments on additional facilities like buildings, off site,
utilities, furniture, vehicles, etc.

They are generally developed in line with action plan drawn on Long Range Plan (5 years) /
Perspective plan (10-15 years) of the corporation. No expenditure on plan schemes is incurred
unless the scheme is included in the approved annual plan document with a budget allocation
for the year and also the scheme is approved by competent authority as per the delegation of
powers. The annual plan is required to be submitted to the Government by mid September
every year.

It is essential that the revised outlay for the current year and the outlay required for the next
year are assessed realistically in order to ensure that the total actual expenditure would be
close to the proposed outlay.

NON- PLAN SCHEMES (AF):

The AF schemes encompasses wide spectrum of activities covering safety, statutory

requirements, technology up gradation, welfare, replacements/addition of assets, operational
necessities, etc. Individually AF schemes may be lower cost, collectively they may account
for significant portion of the total capital expenditure. Therefore the handling of AF schemes
with regard to their selection, accurate cost estimates and timely completion assumes a great

45
significance. The schemes need to be judiciously implemented after detailed study of various
alternatives available.

DESCRIPTION OF ACTIVITIES

Once the evaluation of alternatives and selection of the optimum scheme is completed the
proposal should be developed with sufficient detailing.

Some of the major considerations/ requirements at this stage are listed below:

BENEFITS /SAVING FROM THE PROPOSALS

 The importance ability of the proposed scheme must be fully explored with reference
to area requirements vis-à-vis availability, extent of enabling jobs required, execution
feasibility (impact on running units, safety precautions needed, etc.), shut down
requirements, utility requirements/ availability, hook up jobs, etc. these must also be
documented as part of the proposal.

 Efforts must be made to identify and examine the utility of redundant/-unutilized

materials available in the plant. This would help in cutting down cost and time
besides ensuring the use of idle equipment.

 The proposal should include only those activities/ facilities need for meeting the
objective. Each element/ activity included in the proposal must be backed by
adequate justification for its inclusion. It is always better not to include an entirely
unrelated activity/ facility in a proposal but rather make a separate proposal with
justification, etc. for the same.

 In case the proposal envisages the introduction of new technology/ process/

equipments, it is desirable to gather reliable information on the performance of
similar process/ equipment elsewhere within the country or outside, instead of relying
entirely on the vendor’s claims.

 An assessment of the additional manpower requirements for operating the proposed

facility should be made and included as a part of the proposal.

46
  The methodology or execution of the project should be finalized at the proposal
stages itself. In case it is felt necessary to engage a consultant, adequate justification
for the same, job scope for consultant etc. must be clearly mentioned in the proposal.

PROJECT COST ESTIMATES

 Need for realistic cost estimates

The importance of making an accurate cost estimate4 cannot be over stressed. It will
have a direct bearing on the economic viability of the scheme. While over-estimation
may cause blockage of funds which otherwise could be utilized profitability for some
other purpose, under estimation would necessitate repeated approvals for cost
overruns and may also affect the project completion schedules.

 Basis

It is essential that the basis adopted for cost estimation of all major components be
included. Generally, cost estimates for major equipments, imported goods,
proprietary items etc. shall be on the basis of current budgetary quotations. Detailed
work ups, copies of quotations etc, must be enclosed with the proposal. The effort
shall always be to base the cost estimates on a sound basis.

 Escalation

All cost estimates shall be as on the date of submission of the proposal and the rate of
escalation adopted for different cost estimates shall be indicated, along with basis.

 Foreign exchange requirements

The foreign exchange requirements are to be worked out separately and shown. The
need to import equipments /process etc. involving outgo of Foreign exchange are to
be critically reviewed, indigenous availability fully explored and foreign exchange
component of the proposal kept to the bare minimum.

47
 METHODOLOGY:

DATA COLLECTION:

Data Source:

(a) Primary Data :

1. The Technical and Engineering Service

2. Maintenance & Inspection

3. Environmental Control

4. Finance Department

5. FCC Unit

(b) Secondary Data :

1. Annual General Reports

2. FCCU Catalogue

3. Plant Records

4. Library and Websites

48
CAPITAL BUDGETING FOR SETTING UP OF FACILITIES FOR
PRODUCTION OF METHYL-TERTIARY-BUTYLETHER
(MTBE) AT MATHURA REFINERY

INTRODUCTION:

LPG produced from FCC unit at Mathura Refinery is presently supplied to IPCL. After
recovering the Propylene potential from it. IPCL return back the balance streams comprising
of Propane and C4 components. C4 components consist of Isobutylene, Butane 1 & 2,
Isobutene and N-butane. These components are valuable feed stocks for various downstream
petrochemicals and separation / conversion of the same would result in high diversification, it
is envisaged to produce Methyle-Tertinery-Buty1 Ether (MTBE) from C4 components by
etherification of Isobutylene content present in the C4 stream. This will not only result in
value –addition but also enable Mathura Refinery to meet the future stringent specification of
Motor Spirit (MS) in respect of Anti Knock Index and Vapor Lock Index.

With the operating capability of FCC unit to about 1.25 MMTPA against the design capacity
of 1.0 MMTPA, the potential of Isobutylene present in LPG of FCC unit is around 14-15,000
TPA. The potential can further be increased to about 18-19,000 TPA by up gradation of
existing catalyst with suitable high activity catalyst higher amount of lighter products. MTBE
that can be generated from the above Isobutylene is estimated to be further enhanced to a
level of about 37,000 TPA with the revamp of FCC unit to 1.5 MMTPA planned along with
new 3.0 MMTPA. Crude Distillation Unit (stage-II approval of revamp, potential of FCC
revamp give by M/s UOP.

In view of the above it is considered to put up a MTBE plant to utilize potential Isobutylene
to produce around 27,000 TPA of MTBE. A cushion of 25% is being dept in the design to
take care of additional 7,000 TPA Isobutylene to produce around 27,000 TPA of MTBE. A
cushion of 25% is being dept in the design to take care of additional 7,000 TPA Isobutylene
that would be available after FCC revamp increasing the MTBE production to a level of
37,000 TPA

49
 OBJECTIVES OF THE STUDY :

 To check the feasibility of providing facilities at FCC unit for production of MTBE.

 To recommend the appropriate and most feasible alternative for revamping of FCC
unit with lowest investment.

PROJECT COST :

The estimated cost of the MTBE project at Mathura Refinery is Rs. 45 Crores including
foreign exchange. The cost has been worked out based on April 2006 and no escalation
beyond April 2006 has been considered.

OPERATING COST :

The Operating cost for the grass root plant MTBE includes cost towards utilities, chemicals,
adsorbents, catalysts, salaries, wages, repairs, general administration and overheads,
consumables etc. The operating cost for the chemicals, catalysts, utilities for the MTBE plant
are considered based on the information provided by the process licensor.

ENVIRONMENTAL ASPECTS :

The addition of the oxygenated compounds like MTBE may be mandatory in the near future
to reduce CO pollution for the maintaining the Ozone layer in the atmosphere. Other countries
like USA and Europe have already adopted reformulated gasoline concept wherein the
addition of oxygenates is mandatory.

ENERGY CONSERAVATION MEASURE :

The various new facilities to be provided under this project would be designed to meet the
high standard of energy efficiency. This would include the recovery of heat form the furnace
flue gases, recovery of heat from hot process streams, used of Distributed Digital Control
System and optimum use of utilities.

50
PROJECT MANAGEMENT :

Process package of license units is proposed to be carried out by license processor for the
technology whereas for offsite / utilities, basic engineering would be done through
engineering consultant. A reputed consultant who has the experience in project management
of MTBE plant shall be engaged for the project management and construction supervision on
temporary basis.

ANALYSIS:

Analysis of the project was done on the basis of the parameters mentioned below.

NPV (Net Present Value)

T
CFt CF1 CF2 CFT
NPV    CF0    ......... 
t 0 1  r 
t
(1  r ) (1  r )
1 2
(1  r ) T

Internal Rate of Return (IRR) :

T
CFt CF1 CF2 CFT
NPV    CF0    ......... 
t 0 1  IRR  t
(1  IRR ) (1  IRR )
1 2
(1  IRR ) T

Payback Period:

Absolue Value of NCR in that year

Payback Period  ( Last Year With a negative NCF ) 
Total Cash Flow in the following year

Need:

It is clear from the above that Mathura Refinery will not be in a position to meet revised MS
Specifications with the existing facilities. Therefore, there is a need to provide facilities for
achieving revised MS Specification at Mathura Refinery.

Analysis of Alternatives

Project Authorities have analyzed following alternatives for generating high octane MS
component :

Alternative 1 : Reformer for generating high octane reformate

51
Alternative 2 : Alkylation Unit for Generating high octane Alkyl ate.

Alternative 3 : Isomerisation Unit for generating high octane Isomer ate.

Alternative 4 : MTBE Unit for generating high octane MTBE.

Alternative 1 was rejected on the problem on high Benzene content and high investment cost.

Alternative 2 was rejected due to the use of Hydrofluoric Acid (HF) as Catalyst which is not
eco-friendly and due to high investment cost.

Alternative 3 was rejected due to very low capacity of the plant (63 TMTPA against
minimum economic size of 150 TMTPA)

Alternative 4 was using blending of MTBE has been found to be just meeting the blending
requirement for making 911 TMTPA MS with relatively low investment in the post FCC
revamp operation.

TECHNICAL EVALUATION:

LOCATION SITE :

The proposed facilities shall require about one acre land and shall be located inside the
existing battery area of Mathura Refinery. The required area has been envisaged to be
generated by knocking off the idle equipments of Caustic and Acid Treatment Facilities on
the West side of the existing PDF Unit.

CAPACITY:

The proposed Capacity of 40,000 TMTPA MTBE Plant is based on Cracked LPG generation
in the post FCCU revamp operation.

TECHNOLOGY:

The proposed technology is based on the technology of M/S. CD Tech., Netherlands, who has
alliance with M/s. ABB Lummis. Proposed technology has a unique feature that rea

and product purification takes place in a single column. The same technology has been used
world wide for making MTBE from FCC LPG feedstock.

FACILITIES:

The facilities envisaged under the project are as under :

52
  Splitter facility separation of C3 and C4 components of FCC LPG.

 Unit comprising of reactor / distillation columns along with purification system for
production of MTBE.

 Two new tanks of 5000 M3 Capacity each for storage of MTBE along with blending
facilities in finished MS pool.

 Associated pumps, piping’s, instrumentation etc.

PHASING OF EXPENDITURE

The proposed project to create facilities at Mathura Refinery to produce 40,000 TPA of
MTBE is expected to complete within 30 months from the date of approval. These facilities
will be operative from the fourth year after the commencement of the project. The expected
cost of the project as discussed earlier is 45.00 Crores. The investment is decided to divide in
three financial years talking several factors into consideration. The schedule of phasing of
expenditure is shown as under.

Year Amount (Rs. In Crore)

1st Year 9.0

2nd Year 18.0

3rd Year 18.0

Total 45.0

COMPLETION SCHEDULE:

The project on providing facilities at Mathura Refinery to produce 40,000 TPA of MTBE is
scheduled for completion within 30 months from the date of approval

53
ADDITIONAL MANPOWER REQUIRED:

Impact of proposal for providing the facilities at Mathura Refinery to produce 40,000 TPA of
MTBE on the deployment of manpower is one of the very important factors to be taken into
consideration.

Total 30 numbers of additional manpower is envisaged for the proposal facilities. This has
been taken into consideration while working out operating cost and economics of the project.
However, efforts will be made to generate required additional manpower from within by
redeployment/ restructuring.

54
 Chapter 3

analysis and interpretation of data

55
FINANCIAL ANALYSIS

The estimated cost for the project works out at Rs. 4500 lakhs inclusive of foreign exchange
of Rs 4.3 crore based on budgetary offer and in house data available for the various ongoing
projects. The cost estimates are expected to be within an accuracy level of +/- 20%. FE
component is Rs. 435 lakhs. The Projects cost includes design change allowance @ 10% and
contingency @ 10%.

Basis of financial calculation (Free Pricing):

The financial analysis of the project with operational life of 15 Years with cash flow analysis
has been done.

 The depreciation rate @ 25% at written down value (WDV) of plant & machinery
and 10% WDV for Civil items has been considered for income tax calculation.

 Corporation tax has been calculated @ 35% with surcharge. On tax “10% on profit
after adjustment of depreciation.

 The financial analysis has been worked out free pricing mechanism.

 Capacity utilization has been considered as 75% for the first year and 100% for the
second year.

56
No. PARTICULARS F. I. C. Total
EX.

1 Land 0.0 0.0 0.0

2 Site Development - 50.0 50.0

3 Process Design, Engineering 79.0 108.0 187.0

4 Royalty & know- how 82.0 28.7 110.7

5 Plant & Machinery 266.4 2931.9 3198.3

6 Water Supply & public Health - 20.0 20.0

7 Office equipments & furniture - 25.0 25.0

8 Construction Site - 70.0 70.0

Requirement

9 Construction period expenses - 45.0 45.0

10 Start up Expenses 9.5 3.5 13.0

Sub Total (1 to 10) 436.9 3282.1 3719.0

Design Change allowance @ 43.6 328.21 371.9

10%

Sub Total 480.5 3610.3 4090.9

Contingency @ 10% 48.05 361.03 409.1

Grand Total 528.6 3971.3 4500.0

Project cost Rs. 45 crore

OPERATING COST: (RS/LAKHS)

Catalyst 90.00 120.00 120.00

57
 Salaries 67.50 90.00 90.00
Chemicals 97.50 130.00 130.00
Utilities 82.50 110.00 110.00
R & M (2.5 %) 84.75 113.00 113.00
Gen. Admen. (0.5%) 20.25 27.00 27.00
Consumables (0.10%) 3.75 5.00 5.00
Insurance (0.10%0 5.25 7.00 7.00
Total 451.50 602.00 602.00

DEPRECIATION

Year Plant & WDV Other WDV Total WDV

Machinery Dep. Civil Dep. Dep.
@ 25 % Items 10%
1 3198.3 79935 25.0 2.5 3223.3 802.1
2 2398.7 599.6 22.5 2.2 2421.2 601.9
3 1799.0 449.7 20.3 20. 1819.3 451.7
4 1349.3 337.3 18.2 1.8 1367.5 339.1
5 1012.0 252.9 16.4 1.6 1028.4 254.6
6 758.9 189.7 14.7 1.4 773.7 191.2
7 569.2 142.3 13.3 1.3 582.5 143.6
8 426.9 106.7 11.9 1.1 438.8 107.9
9 320.1 80.1 10.7 1.1 330.9 81.2
10 240.1 60.1 9.7 0.9 249.8 61.1
11 180.1 45.1 8.7 0.8 188.8 45.8
12 135.1 33.7 7.8 0.7 142.9 34.5
13 101.3 25.3 7.1 0.7 108.3 26.1
14 75.9 18.9 6.3 0.6 82.3 19.6
15 56.9 14.3 5.7 0.5 62.7 14.8

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 Chapter 4

Conclusions and recommendations

59
 FINDINGS

The proposed project for providing facilities for production of MTBE at FCC unit in
Mathura Refinery is found feasible in Financial, Technical Analysis. The decision to
accept or reject a capital Budgeting project depends on an analysis of the cash flows
generated by the project and cost of the project as well as the tools of capital
Budgeting are considered for measuring financial feasibility of project: from the
Financial analysis the following points can be concluded to accept this project.

 The Project cost is 4500 lakhs and Sales realization from the difference of
input and output of MTBE is calculated to be 2041 lakhs.
 The Payback Period is 4.1 years means the amount of time that it takes for a to
recovery its initial cost here calculated at 4.1 years.
 From the estimated cash flow of the project the Internal Rate of Return (IRR)
is 17 % which represents that the project is feasible to accept.
 The Net Present value of the project is calculated at $890. 48
 From the technical analysis and studying the market demand scenario the
project is found viable to accept.
 As shown in financial analysis the sales realization is considered as operating
income and the operating cost is also calculated at 602 lakhs.

60
 RECOMMENDATIONS:

In the proposed Project the process by which I study the different aspects of proposal,
and decides about feasibility and viability of the project, represents that payback, net
presents value, and IRR are the methods available for measuring the firm’s return on
an investment project.

Payback Period is 4.1 years, which represents the amount of time that is takes for a
Capital Budgeting project to recover its initial cost. The Internal Rate of Return (IRR)
of a project is 17% means it is the discount rate at which the Net Present Value (NPV)
of a project equals zero. The Net Present value of Projects is $890.48 that equal to the
sum of the presents value of all the cash Flows associated with the projects.

61
 Bibliography

Matter is taken from:

 www.galaxy.com( Internal site of Mathura Refinery)

 www.iocl.com

 www.mysap.com

 Project Manthan

 Development Report of Mathura Refinery

 Manual of S.A.P

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