Wednesday, September 2, 2009

FINANCIAL JUSTIFICATION FOR PROJECTS


FINANCIAL JUSTIFICATION FOR CONVERSION OF GAUGE
Estimation of earnings:
In assessing the additional earnings likely to move on the main line from the new line credit should be taken only for the portion of such traffic which would have been carried on the main line. In cases of Group justification selection of priorities after consideration of various alternatives should be done with a view to sub-optimization.
Assessment of working expenses:
for the calculation of cost of new service the unit cost from the Green Book can be adopted, It is realistic to adopt to long term Variable cost i.e. I 78% of the fully Distributed Cost. The financial benefit in a Conversion project will consists of savings in fuel cost and reduction in working expenses. Conversion projects requir­ing remodeling of yard should be proceeded by work study.
Provision of rolling stock:
All conversion projects should provide for the initial investment of rolling stock. This should be based on tonnage to be carried, the loadability, the lead of traffic, empty haulage, wagon turnaround etc.
General rules to be observed:
While formulation of a project scheduling of investment have to be made in proper sense while making estimation of cash outflow and inflow the inflationary element should not be taken into account since it will introduce element of subjectivity. For the conversion projects it should be ensured that a proper techno-economic survey has been conducted and the assessment of earnings and working expenses have been made on a realistic basis and an association of accounts officer also made in the survey.
Example: Calculation of Financial justification under DCF Technique
Application of DCF method involves reasonably accurate forecast of figures which are assumed purely here for illustra­tive purpose.

NAME OF WORK: conversion of line between x and y stations
Cost of work: 220 lakhs Allocation Capital:170 lakhs;
Life of the project: 30 years DRF: 50 lakhs

RETURN OVER A 30 YEARS PERIOD AFTER THE LINE IS OPEN TO TRAFFIC
(Rupees in lakhs)
Year after
opening
Additional net earnings
On line(excluding
depreciation)
Savings due to
BG working
Savings due to
Avoidance of
transshipment
total
1st
4.00
5.00
3.00
12.00
2nd
4.50
6.00
3.50
14.00
3rd
5.00
6.50
4.00
15.50
4th
5.50
7.00
4.50
17.00
5th
5.83
7.50
5.00
18.33
-----------
-----------
-----------
-----------
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6th
5.83
8.05
5.37
19.25
7th
6.30
8.50
6.00
20.80
8th
7.00
9.00
6.00
22.00
9th
7.50
9.50
6.00
23.00




161.88
10th to 30th
8.00
10.00
6.50
24.50


Total net gain from the project in 30 years = Rs 676.38 lakhs
(Rs 161.88) + Rs 24.50 x 21 years = Rs 678.38 lakhs
The rate of return on the DCF table is that rate at which the total Discounted Present Worth of earnings equals the capital cost (including interest during construction) where the interest is reckoned at the rate at which the net earnings are discounted.

(a) rate of discount 0% 06% 9 %
(b)Capital cost including interest during construction 220.00 226.6 230.0

CAPITAL OUTLAY
TIMING CASH OUTFLOW FACTOR NET CASH OUTFLOW
1 YEAR 110.0 1.06 116.0 Lakhs
0 YEARS 110.0 0.00 110.0 Lakhs
TOTAL 226.0 Lakhs


DISCOUNTED PRESENT WORTH OF NET EARNINGS
Year Net Earnings Factor @ 6 % amount Factor@ 9 % AMOUNT

1st 12.00 9.94 11.28 0.92 11.04

2nd 14.00 0,89 12.46 0.64 11.76

3rd 15.50 0,84 13.02 0.77 11.95

4th 17.00 0.79 13.43 0.71 12.07

5TH 18.5 0.75 13.74 0.65 11.91

6th. 19.25 0.70 13.47 0.60 11.55

7th 20.80 0.66 13.73 0.55 11.44

8th 22.00 0.63 13,86 0.51 11.22
9th

10th 23.00 0.59 13.57 0-46 10.58

10th to 514.50 6.96 170.27 4.26 104.37
20TH
24.5 %
per
annum
676.38 288.83 207.87


CASH OUT FLOW Rs (-) 226.6 288.83 207.87
Cash inflow at 6 % Rs 288.85 (-) 226.60
Cash inflow at 9 % Rs 207.87 (-) 226.60
Net 62.23 18.73 (-)

Rate of return by interpolation method
* 6 % (-) 9% = 3: ** 62.23 + (18.73) = 80.96
*6 % + 62.23 X 3 = 6 + 2.30= 8.30 %
80.96**
RATE OF RETURN = 8.30 %




FINANCIAL JUSTIFICATION FOR PROVISION OF ADDITIONAL LOOP LINE AND FOR SIMULTANEOUS RECEPTION FACILITIES

It is proposed to provide an additional loop line at X station and Y station at a cost of Rs 36.65 lakhs to avoid detention to freight trains. Detention to freight train results in loss of path, crew exceeding duty hours, disruption to loco links affecting passenger trains punctuality. Hence extension of the existing siding of the 23 vehicle capacity at a full length loop with signaled arrangements with simultaneous reception facilities is essential. It would not only help in overcoming the operating constraints but also would give additional benefits as below:
1. increased line capacity
2. flexibility in crossing of trains
3. over all improvement in running time both for passenger and freight trains
4. strict adherence to 10 hours rule to crew
5. savings in detention to rolling stock – coaches, wagons, locos etc

As already stated the proposed cost is Rs 36.65 lakhs out of which 24 lakhs for civil Engineering Rs 12 lakhs for Signal & Telecommunication works and 0.63 lakhs for electrical engineering works.

For working out financial implication a minimum savings in detention of 60 minutes for 2 trains has been taken into account. The work is chargeable to capital.

Savings due to elimination of detention to stock – locos and wagons
1. No of freight trains = 2
2. Minimum savings for each train = 1 hour
3. Savings per day = 1 X 2 = 2 hours
4. Diesel engine hours saved per day = 2 hours
5. Diesel engine hours saved per annum= 2 X 365 days = 730 hours
6. Total No of wagons per train = 60
7. Total No of wagons handled per day = 60 X 2 = 120 wagons
8. Total wagon hours saving = 1X 120 = 120 hours
9. Total wagon hours saved per annum = 120 X 365 = 43800 hours

Savings on wagons
1. wagon hours converted to wagons = 43800 / 365X24= 5.00 wagons
2. add 3.81 % for repair and maintenance = 0.19
3. No of wagons saved per day = 5.19
4. No of wagons per annum = 5.19 X 365 days = 1894 wagons
5. cost of provision and maintenance per wagon per day = Rs26.29
6. cost of provision and maintenance for 1894 wagons = 26.29 X 1894= Rs 49493
7. add 30.42 % for escalation Rs 15142
8. total savings on wagons Rs 64935

Savings on locos
1. engine hours saved per annum = 2 X 365= 730 hours
2. engine hours per day per engine = 22.3
3. No of engines saved = 2/ 22.3 =0.089
4. add 9.42 % for repairs (0.089 x 9.42 %) = 0.008
5. total No of engines saved = 0.097
6. cost of operating one Loco = Rs 7487448
7. cost of operating 0.097 loco = Rs 726282

Total savings
On wagons = Rs 64935.00
On locos = Rs 726282.00 (+)
Total = Rs 791217.00

Annual recurring expenses for repairs and maintenance of additional loop at 3 % of the capital cost Rs 109950

Financial implication under DCF technique

details year timing cash cash net cash trial rate @ 12 % trial rate @ 20 %
in years outflow inflow flow factor factor

(A)
cash 07-08 1 1832 - 1832 1.12 2052 1.2 2198
outlay 08-09 0 1833 1833 1.00 1833 1.0 1833
3665 3665 - 3885 - 4031
(B)
savings07-08
for 36-37 30 -110 8.055 5485 4.979 3390
30
years
difference between (A) and (B) 1600 - 641

* 12 % (-) 20 = 8: ** 1600 + (641) = 2241
interpolation method = 12* % + 8 X1600/2241**= 12 + 5.71 = 17.71

3 comments:

  1. SIR , I WANT TO READ MORE MATTER ABOUT DCF TECHNIQUE WITH SOME EXAMPLES . THANKS

    ReplyDelete
  2. my email id is nealrs4775@gmail.com

    ReplyDelete
  3. Enriching post but give some example of new lines.

    ReplyDelete