A Project Report on

Investment Decision
(Payback period &
NPV)
For

Submitted toMr. C. Nagapawan (Coordinator, IMBA)

&
Mr. R. K. Das (Faculty, IMBA)

Submitted by-

Varsha Pandey (Roll

no. - 33)

Mitusha Kumari
Meera Mishra
Manisha Mishra
Apurva Utkarsh

(Roll no. 18)

(Roll no. - 17)
(Roll no. - 15)
(Roll no. - 03)

ACKNOWLEDGEMENT

We would like to avail the presentation of the project report on the

topic Investment decision by NPV and PAY BACK period method
of ENEL Ltd ,This report would have been impossible wuthout the
support and guidance that we received from various people at
different stages of the project. We were given an insight of all
practical aspects and learnt valuable things by making this project
report .
Our sincere thanks to our guide Mr. Raju Kumar Das
whose excellent guidance, encouragement and patience has made
possible the successful completion of this project.

Date-

CERTIFICATE

This is to certify that Ms. Varsha Pandey, Ms. Mitusha,

Ms. Meera Mishra, Ms. Manisha Mishra and Mr.
Apurva Utkarsh have sucessfully completed and
submitted the project report on the topic Inevestment
Decision by NPV and Payback Period Method for Enel Ltd. under
the guidance of the undersigned.

Mr. C. Nagapawan

Mr. R.K. Das

(Coordinator, IMBA)

(Faculty, IMBA)

Index:
Opening of the project

Foreign Direct Investment

FDI in India

Areas of investment

Investing Companys Profile (Enel)

10

Why Enel??

13

Location

15

Why Jharkhand??

16

Numerical assessment of the project

19

Conclusion & recommendation

23

Bibliography

24

Opening
Every economy has its own characteristics. Indian
economy also has. Some of its characteristics are Low level of income
Poor capital formation
Low level of technology
Unexploited natural resources
Poor infrastructure

These issues can be addressed in a number

of ways. One of which is Foreign Direct Investment or
FDI.

Foreign Direct
InvestmentFDI refers to capital
inflows from abroad that invest in the production
capacity of the economy. It is a more preferred
form of external finance. It benefits an economy
by triggering technology
spillovers,
assisting human capital
formation,
contributing to international
trade integration and
particularly exports,
helping create a more
competitive business
environment,
enhancing enterprise
development,
increasing total factor
productivity and,
more generally, improving the
efficiency of resource use.

FDI in IndiaForeign direct investment

(FDI) in India has played an important role in the
development of the Indian economy. FDI in India
has - in a lot of ways - enabled India to achieve
a certain degree of financial stability, growth and
development. This money has allowed India to
focus on the areas that may have needed
economic attention, and address the various
problems that continue to challenge the country.
India has continually
sought to attract FDI from the worlds major investors.
In 1998 and 1999, the Indian national government
announced a number of reforms designed to
encourage FDI and present a favorable scenario for
investors. FDI are permitted through financial
collaborations, through private equity or preferential
allotments, by way of capital markets through Euro
issues, and in joint ventures. FDI is not permitted in
the arms, nuclear, railway, coal & lignite or mining
industries.

A number of projects have been announced in

areas such as electricity generation, distribution
and transmission, as well as the development of
roads and highways, with opportunities for
foreign investors.

But even today a lot of natural resources are

untapped and a lot is needed to be done for a
rapid capital formation. Thus FDI is one of the
most sought after measures to tackle these
issues.

Areas of Investment8

Areas that need special attention

are health care, infrastructure, electricity generation,
real estate, etc. We have considered electricity
generation or energy sector as our area of interest for
this project.

Investing Company

ProfileEnel (Ente Nazionale per l'Energia eLettrica) is an

Italian energy provider, the third-largest in Europe by
market capitalization. Formerly a state-owned
monopoly, it is now partially privatized with Italian
government control: the largest shareholders are the
Italian Ministry of Economy & Finance (13.9%) and
the state-run bank Cassa Depositi e Prestiti (17.4%).

Industry- Energy
Founded- 27 November 1962

10

Headquarter- Rome, Italy

Areas served-

Products- Natural Gas and Electricity

Italy, Spain, France,

Belgium, Greece, Bulgaria, Slovakia,
Romania, Russia, USA, Chile, Nicargua, El
Salvador, Panama, Costa Rica and Brazil

production & distribution

Revenue- 73.38 billion (2010)

Operating income- 11.26 billion

(2010)

Profit- 5.390 billion (2010)

Total assets- 168.05 billion (end

2010)

Total equity-

53.55 billion (end

2010)

11

In a nutshell, Enel is Italys largest power company,

and Europes second listed utility by installed capacity.
It is an integrated player, active in the power and gas
sectors. Enel operates in more than 40 countries
worldwide, has around 95,000 MW of net installed
capacity and sells power and gas to more than 61
million customers.

Why Enel??
12

It is clear from the chart below that the

proceeds of the company has increased over years
and so has happened with the profit which rose from
3,036 million in 2006 to 3895 million in 2007 to
3977 million in 2008 to 5293 million in 2009.
According to Forbes, the net profit of
Enel stood around 5390 million at the end of 2010.

All figures are in million Euros

The company has also been able to pay dividends to

its shareholders every year. Enel has got plenty of
experience in the international market and has been
doing well.

13

It can be concluded that Enel is

in sound position to start its operation in India and
invest on a new project.

LocationWhile selecting the location for a

project few things are essentially consideredavailability of raw materials, cheap and plenty of man
power, transportation facilities, connectivity with the
market, government policies, etc. Keeping these
points in mind the best suited place for Enel to invest
is Jharkhand.

14

Why JharkhandJharkhand is gifted with a

variety of natural endowments. It has a great
natural storage of coal and minerals including iron
ore, mica, uranium, etc. . Most of the electricity
generation potential are untapped. There is
immense potential for setting up of Thermal,
Hydel, Geothermal, Atomic, Methane and Gas
based new power plants in Jharkhand.

15

All fig. in MW

The installed capacity of power in Jharkhand is 2,590

MW. This includes 420 MW (Tenughat Thermal Power
Station), 840 MW (Patratu Thermal Power Station),
130 MW (Sikkidri Hydel) and 1,200 MW (DVC,
Thermal/Hydel). The prospects of capacity addition in
both the thermal and hydel sectors are 4,736 MW.
This includes 686 MW hydel generations.
Jharkhand also has a big cheap man
force. Besides it is also well connected with the major
cities in India via roads, railways and aviation.

16

Roads: The total length of roads in the State is 4,311

km. This inlcudes 1,500 km national highways and

2,711 km state highways.
Railways: The State has a well-developed railway

system. Ranchi, Bokaro, Dhanbad, Jamshedpur are

some of the major railway stations.
Aviation: Ranchi is connected with Delhi, Patna and

Mumbai. Jamshedpur, Bokaro, Giridih, Deoghar,

Hazaribagh, Daltonganj and Noamundi have air
strips.
The development of power sector is also given
highest priority in the states
economic planning to bridge the gap between
demand and supply.

For how long, how much and

forecast-

17

Considering the need and

scope of the energy sector and also considering the
investment potential of Enel, it is recommended to
invest Rs. 100 cr. on electricity generation project in
Jharkhand for a period of 5 years in initial stage.
After completion of 5 years the future
course of operation will be decided.
Considering the potential in the power
sector the income forecast for the project after
depreciation and tax for a period of 5 years is Rs. 20
cr. , Rs. 40 cr. , Rs. 30 cr. , Rs. 40 cr. and Rs. 60 cr. .

Payback period of the

projectPayback
period refers to the period of time required for the
return on an investment to repay the sum of the
original investment.

18

Year

Cash inflow

01
02
03
04
05

20,oo,oo,000
40,00,00,000
30,00,00,000
40,00,00,000
60,00,00,000

Cumulative cash
inflow
20,00,00,000
60,00,00,000
90,00,00,000
1,30,00,00,000
1,90,00,00,000

Payback period= (1,00,00,00,000-90,00,00,ooo) +3

40,oo,00,000
= 3.25 years

Net present value of the

projectNet Present Value is one of the
discounted cash flow techniques that explicitly
recognizes the time value of money.

19

The NPV method discounts inflows and

outflows to their present value at the appropriate cost
of capital and sets the present value of cash flows
against the present value of outflows. Thus, the net
present value is obtained by subtracting the present
value of cash outflows.

If the required rate of return is

assumed to be 20% by the company then
Year Cash inflow (Rs.)

1
2
3
4
5

20,00,00,000

Discounting factor
0.893

PV of cash inflow (Rs.)

16,66,00,000

40,00,00,000

0.694

27,76,00,000

30,00,00,000

0.579

17,37,00,000

40,00,00,000

0.482

19,82,00,000

60,00,00,000

0.402

24,12,00,000

Total

1,05,73,00,000
20

Net Present Value= Cash inflow Cash outflow

By formula:
NPV= Rs. (1,05,73,00,000 1,00,00,00,000)
= Rs.5,73,00,000
COMMENT:
We can see that NPV of the project is positive.
Thus, this project should be considered by Enel.

Conclusion and RecommendationThe calculations show that the NPV of

the project is more than the investment done and the
company will get the repayment of the investment made in
3.25 years. The return generated after the payback period
will obviously be surplus for the company. After completion of
5 years, the company will have to decide whether it wants to
go ahead with the project for some more time or not
depending on the then situations. If the company decides to
go ahead after 5 years, it will not have to spend much on
getting the fixed assets. The surplus return generated at the
end of 5 years will itself be able to meet the then
21

requirements (except in some odd circumstances). These

facts altogether suggest that there is a favorable condition
for investment in this project.
Thus the project is recommended to be
accepted by Enel.

BIBLIOGRAPHY

Text book of Financial Management by M. Y.

Khan
Website of Dept. of Industries, Govt. of
Jharkhand
Website of Enel Energy Ltd.

22

 Website of Forbes

23