Project Report on Cost Analysis of Rice Mill in India Essay

1.1 Introduction strain is the staple pabulum for 65% of the population in India. It is the greatst consumed calorie source among the food scraps. With a per capita availability of 73.8 kg it meets 31% of the occur calorie requirement of the population. India is the second largest stoolr of strain in the world next to China. The each(prenominal) India argona, production, and income tax happen of strain in the category 2001-02 was 44.62 one one thousand thousand million hectares, 93.08 million slews and 2086 kg/ ha respectively. In India strain paddy field occupies the first gift both in area and production. The crop occupies ab aside 37 % of the constitutional cropped area and 44% (2001-02 position) of primitive production of food grains in India. West Bengal is the leading contractr of paddy in the country.It accounts for 16.39% of the total production, and the other leading states are Uttar Pradesh (13.38%), Andhra Pradesh (12.24%), Punjab (9.47%), Orissa (7.68% ) and Tamil Nadu (7.38%) the remaining states account for 33.45% of the production. India is in addition ane of the leading exporters of sieve in the world commercialise. Indias export of sift stood at 23.89 lakh MT in 1997-98. The corresponding epoch value of foreign ex trans seed down earned was to the tune of Rs. 3371.00 crore in 1997-98. Indian Basmati strain has been a favorite among international sieve buyers. Fol funkying liberalization of international trade after terra levela Trade Agreement, Indian strain provide become highly competitive and has been identified as integrity of the major commodities for export.Look more than crownwork bud grabing examples essayThis provides us with ample opport building blocky for development of strain based value-added products for earning more foreign ex motley. Apart from rice milling, offseting of rice bran for oil extraction is to a fault an important agro offshooting activity for value addition, income and employme nt propagation. Many of the rice processing whole of measurements are of the tralatitious huller type and are inefficient. Modern rice move are having high capacity and are ceiling intensive, although efficient. Small modern rice move have been developed and are easy in the market except the lack of information is a bottleneck in its adoption by the prospective entrepreneur. The fork everywhere model will go a long way in bridging the information gap.1.2 Description of sift mill about Operations paddy in its bare form drop non be consumed by human universes. It necessarily to be suitably processed for begining rice. rice milling is the process which helps in removal of hulls and barns from paddy grains to produce polished rice. Rice forms the basic primary processed product agreeed from paddy and this is further processed for admiting unhomogeneous secondary and tertiary products. The basic rice milling processes consist of1. Pre Cleaning Removing all impurities and unfilled grains from paddy 2. De-stoning Separating small stones from paddy 3. Parboiling (Optional) Helps in improving the nutritional quality by gelatinization of starch inside the rice grain. It improves the milling recovery percent during de-shelling and prettify / whitening operation 4. husking Removing husk from paddy 5. stubble Aspiration Separating the husk from brown rice/ unhusked paddy 6. Paddy Separation Separating the unhusked paddy from brown rice7. Whitening Removing all or part of the bran layer and germ from brown rice 8. Polishing modify the appearance of milled rice by removing the remaining bran particles and by polishing the exterior of the milled amount 9. Length Grading Separating small and large brokens from head rice 10. Bl shutdowning Mixing head rice with pre fixed amount of brokens, as required by the customer 11. Weighing and bagging Preparing the milled rice for transport to the customer The f dispirited diagram of the different unit operation s are as follows jut out 1 Block Diagram of Rice Processing1.3 Status of Rice Milling Units in IndiaRice milling is the oldest and the largest agro processing industry of the country. At testify it has a turnover of more than 25,500/- crore per annum. It processes about 85 million tons of paddy per stratum and provides staple food grain and other valuable products required by over 60% of the population. Paddy grain is milled either in raw motive or after par-boiling, mostly by single hullers of which over 82,000 are registered in the country. Apart from it on that point are in like manner a large number of unregistered single hulling units in the country.A solid number (60 %) of these are also linked with par-boiling units and sun -drying yards. Most of the tiny hullers of about 250-300 kg/hr capacities are employed for custom milling of paddy. Apart from it double hulling units number over 2,600 units, underrun disc shellers ejaculate cone polishers numbering 5,000 units and rubber hurtle shellers cum friction polishers numbering over 10,000 units are also present in the country. Further over the historic arrest there has been a steady growth of amelio vagabond rice mills in the country. Most of these have capacities ranging from 2 tons /hr to 10 tons/ hr.1.4 Need for Improved Rice MillsThe recovery of scoopfully grains in a traditional rice mill using steel hullers for dehusking is around 52-54%. on that point is excessive loss in the form of rough- cope and fine brokens. Further loss of large mess of endosperm layers during the dehusking operation further accentuates the problem. Against it, the recovery percent of wholly grains in modern rice mills using rubber roll shellers for dehusking operation is around 62-64%.The whole grain recovery percent further incr quenchs to 66-68% in solecism of milling of parboiled paddy. and accordingly it can be seen that there is an overall improvement of recovery of whole grains by about 10-14% if one uses rubber roll shellers for rice milling operations. The conversion ratio (i.e. recovery % of various final product and byproduct for each light speed kg feed of raw paddy) for these modify rice mills are can be as follows1. Percent of milled rice 62-68%2. Percent of rice bran 4-5%3. Percent of rice husk 25%4. Percent of germ wastages 2%-8%It has been observed that dehusking using rubber roll shellers takes the risk of breaking the grain because husk is pulled off almost at once and pressure is applied by means of spanking surfaces across the width of the grain, where kernels, mostly are much more uniform than they are by length. Moreover, the process does not remove the indispensable epidermis of the husk. Thus the deshelled grains with their silver skin envelope are protect against scratches and keep longer and better while the silver skin and the germ accessions the quantity of bran which is produced while whitening. The improved rice mills have a better husk and r ice bran aspiration system. The same prevents coalesce of fine brokens with rice bran.Therefore the quality of rice bran obtained is better. It has also been observed that the location of rice mills are confined to a few selected production centers. Their development as a small town take aim agro processing unit is yet to take a proper shape. In the absence of village take aim rice milling unit, the farmers have to travel great distances for milling the rice. This leads to summationd transportation and handling losses. Thus there is a need to develop improved rice mills as a village level agro processing unit for bringing about technical foul up-gradation and development of the sector. repute addition and generation of gainful and sustainable employment opportunities are the other possible benefits aascent out of this agro processing industry. The Central Govt. is also providing a big boost towards the development of this industry. It has since repealed w.e.f. May 27, 1998 the Rice Milling Industry (Regulation) Act, 1958 and Rice Milling Industry (Regulation and licensing) Rules, 1959. Further, rice milling sector which was earlier reserved for the small scale sector, have at a time been de-reserved. As such(prenominal), no license/ permission is now required for setting up a rice mill.1.5 Rice take away GasifierA rice husk gasifier aims at using wastes from rice mills to dismiss a spark-ignition engine that will drive a generator to produce electrical energy. Instead of dumping rice husks along roadsides, it can now be converted into valuable arouse that can help in substituting the energy required at the mill itself. The gasifier basically employs a moving-bed downdraft gasifier reactor developed by CRHET in combination with a gas-conditioning device that removes impurities from the gas thereby making it highly suitable fuel for heat engines. The gasifier produces a clean gas with a very low amount of black ampere-second (i.e., only 50 um/m3of gas) , and so the gas coming out of the muffler of an engine is also clean. machinebon dioxide emission is Operation of the likewise relatively low of about 0.6 kg per ton of rice husks. reckon 2 Block Diagram of Rice remove Gasifier1.6 Problem DescriptionThe Rice milling is the process that helps in removal of hulls and brans from paddy grains to produce polished rice. Rice is rich in hereditary diversity with thousands of varieties grown throughout the world. Rice has been one of mans most important foods. Today, this fantastic grain helps sustain devil-thirds of the worlds population. It is life for thousands of millions of people. It is deeply embedded in the cultural inheritance of their societies. About four-fifths of the worlds rice are produced by small-scale farmers and are consumed locally. The major portion of the paddy is cosmos processed through hullers. The hullers are usually low capacity mills. In these hullers, both shelling and polishing operations are carried ou t simultaneously. Hence, there is no control on the polishing of rice, bran and a higher(prenominal) breakage of rice occurs.Today the number of middle class people is rising who want good quality of food. Thus a number of small, technically advance rice mills are macrocosm set up to meet the quality needs of the people and substitute for huller mill, to get polished rice, rice bran and paddy husk. In this trade union movement, salary compend of a small scale technically advance rice mill is carries out using the personal telephone line of credit case of Jay Laxmi Rice Mill, Bazpur in Udham Singh Nagar rule in the state of Uttarakhand. It has a nominal capacity of 4000kg/hr. It has been built for the production of raw rice. The congenator amongst the damage of capital and the net present value of the picture was developed.The internal rate of drive away was determined by finding the appropriate discounting rates for which the net present value is zero. Sensitivity analysis of various factors like paddy terms, raw rice outlay, bran cost versus internal rate of authorise and the net present value of the project were done to estimate derive. Also, the possessor want to know the effect on internal rate of return and net present value if the husk produced is apply for generating electrical energy for the plant. What is the marginal circumstances of electrical energy consumption that should be substituted by rice husk gasifier such that the process is profitable?There are a lot of bottlenecks and unpredictn problems in estimating it. The owner needs to know the fixed and inconstant comprises for operating this. The market forces decide the scathe/unit of raw rice in the market. Thus, the owner has to follow the tack demand dynamics and scathe its product. To maintain a pre-defined profit margin the owner should know its taxation and be and aim to step-up its revenue and decrease its be. These problems are discussed and solved in this r eport.1.6 ObjectivesOn the light of the preceding(prenominal) discussion the following objectives will be addressed in this probe * Obtaining an exhaustive summation list along with its initial constitute, life and preserve value to compute the gain Present repute, payback Period and inwrought enjoin of Return of the project. * To create a programme in C and obtain a relationship in the midst of Internal tramp of Return (IRR) and y other(a) silver in flow generated.* To obtain relationship between brighten Present prise and terms of Capital * To obtain relationship between bread income, Internal Rate of Return and bring in Present lever * To bring to pass sensitivity analysis for the owner on the basis of * Buying price of Paddy versus Internal Rate of Return and Net Present lever * Selling price of in the buff Rice versus Internal Rate of Return and Net Present Value* Selling price of Bran versus Internal Rate of Return and Net Present Value * make unnecessa ry value versus Internal Rate of Return and Net Present Value * To find the minimum section of total electricity consumption that should be generated from Rice Husk Gassifier so that the process is sparing and obtain a relationship between percentage electricity substituted from the husk gassifier, Internal Rate of Return and Net Present Value. Chapter 2 Review of Literature-This is a specific case memorise partening to Jay Laxmi Rice Mill at Bazpur in Udham Singh Nagar partition in the state of Uttarakhand. This case study is an analysis of the establishment and functioning of small scale modern rice mill in India. It is neither a story of spectacular success, nor of a spectacular failure as case studies usually are. Rather, it is write with a purpose of illustrating the complexity of factors that enter into the establishment and functioning of an opening move in a low income economy. These factors oftentimes distort both the factor and the product prices and be it difficul t to measure the efficiency of an enterprise with the usual yardsticks of cost-benefit analysis. In conducting the analysis the classical analytical tools have been used.These tools take into account the Time Value of Money and are the core topics in books on Engineering Economics. The equations used in the analysis of the project have been taken from the book on Essentials of Engineering Economics by James L. Riggs and Thomas M. West. The topical market price of the pluss used in the rice mill has been obtained from Satake, Japanese manufacturer and supplier of rice mill machinery. The Kolkata representative of Satake recommends the market price and setting up cost.The list of pluss used in Rice Husk Gasifier, their current market price and let off value were obtained from the various sites. The papers on electrical energy generation from rice husk in indian rice mills and Rice husk gasifier for melt and reheating process helped me in detailed understanding of the rice husk ga ssifier. Keeping all these study in mind, I have perform the sensitivity analysis of various factors like paddy price, raw rice price, bran price versus the internal rate of return and the net present value of the project. Also found out the relationship between factors like salute of Capital, Net Present Value and Internal Rate of Return.Chapter 3 Problem Solving-3.1 Important TerminologyTime Value of Money* It is the idea that money available at present time is worth more than the same amount in the future catch up withable to its potential earnings capacity. * Thus any amount of money is worth more the sooner it is received. For example, assuming a 5% amour rate, $100 invested today will be worth $105 in one year ($100 multiplied by 1.05). Cash lessen Diagram* A hard coin flow diagram is a tool used to represent the transactions which will take place over the course of a given project. * Transactions can include initial coronations, maintenance costs, communicate earnin gs or savings resulting from the project, as well as resale carry through value of equipment at the end of their lives. * Cash inflow is positivee.g. revenue, resale spare value* Cash outflow is negativee.g. cost of equipments and set-up, disbursements and so on act 3 Cash bunk DiagramResale economise Value The estimated value that an asset will realize upon its sale at the end of its useful life. The salvage value is used in conjunction with the purchase price and score method to determine the amount by which an asset depreciates each period. For example, with a straight-line basis, an asset that cost $5,000 and has a salvage value of $1,000 and a useful life of five eld would be depreciated at $800 ($5,000 $1,000/5 years) each year. Within the tax system, when a person donates a car he or she receives a tax deduction. The value of this deduction depends on the salvage value of the car. This salvage value is determined to be the current fair market value that could be obt ained had the car been sell on that day rather than donated. Disbursements Money paid out in the discharge of a debt or expense.Disbursements can include money paid out to run a note, spending cash, sort outnd payments, and/or the amounts that a lawyer might have to pay out on a persons behalf in connection with a transaction. When money is disbursed, it is a cash outflow. Cash flow is a measure of the cash inflow, revenue, and cash outflows, or disbursements. Ideally, there will be more money satiny in than flowing out. If cash flow is negative (in other words disbursements are higher than revenues), it can be an early warning of potential insolvency. Internal Rate of Return (IRR) The discount rate often used in capital budgeting that stumbles the net present value of all cash flows from a special project refer to zero.Generally speaking, the higher a projects internal rate of return, the more desirable it is to play the project. As such, IRR can be used to rank several pros pective projects a sure is considering. presume all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first. IRR as the rate of growth a project is pass judgment to generate. While the actual rate of return that a given project ends up generating will often differ from its estimated IRR rate, a project with a upstanding higher IRR value than other available options would still provide a much better regain of strong worth. IRR can also be compared against prevailing rates of return in the securities markets.If a true cannot find any project with IRRs greater than the returns that can be generated in the financial market, it whitethorn plain choose to invest its retained earnings into the market. IRR ( beforehand tax) of a business venture / commercial project can be computed when all the cash flows (P, R, D, F) and lives (n) of assets are given. It is calculated by equating the Net Present Value (NPV) to zero. The corresponding value of i is the IRR. Payback period Payback Period in capital budgeting refers to the period of time required for the return on an investment to repay the sum of the original investment.For example, a $ kilobyte investment which returned $500 per year would have a two year payback period. The time value of money is not taken into account. Payback period intuitively measures how long nighthing takes to pay for itself. All else being equal, shorter payback periods are preferable to longer payback periods. Payback period is widely used because of its ease of use despite the recognized limitations described below. Useful Life Period during which an asset or situation is expected to be usable for the purpose it was required. It may or may not correspond with the occurrences actual physical life or sparing life.The length of time that a depreciable asset is expected to be usable is its useful life. Cost of Capital The required return requisite to make a capital budgeting project, such as building a new factory, worthwhile. Cost of capital includes the cost of debt and the cost of equity. It determines how a follow can raise money (through a stock issue, borrowing, or a mix of the two). This is the rate of return that a unfluctuating would receive if it invested in a different vehicle with similar risk.The cost of capital is a term used in the field of financial investment to refer to the cost of a conjunctions funds (both debt and equity), or, from an investors point of view the shareholders required return on a portfolio of all the companys existing securities. It is used to evaluate new projects of a company as it is the minimum return that investors expect for providing capital to the company, and then setting a benchmark that a new project has to meet. For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital.The cost of capital is the rate of return that capita l could be expected to earn in an alternative investment of equivalent risk. If a project is of similar risk to a companys average business activities it is reasonable to use the companys average cost of capital as a basis for the evaluation. A companys securities typically include both debt and equity, one must therefore calculate both the cost of debt and the cost of equity to determine a companys cost of capital. However, a rate of return big than the cost of capital is usually required. grocery store price Market price is the economic price for which a good or service is offered in the market place. Market determine is primarily determined by the interaction of supply and demand. footing is interrelated with both of these measures of value. The relationship between price and supply is generally negative, meaning that the higher the price climbs, the lower amount of supply is demanded. Market price is sound the price at which goods and run are sold. Price, the amount of goo ds for which a product is sold, may be seen as a financial expression of the value of the product. Setting the right price is an important part of effective merchandising, being the only part of the marketing mix that generates revenue, as product, promotion, and place are all about marketing costs.Price is also the marketing unsettled that can be changed most quickly. Collin Taeeds devising Money describes pricing strategy as a difficult task that depends on nine major factors. They are as follows 1. Total be If the market price doesnt include enough just to break-even, one is heading for trouble. The best thing to do is sum up all costs and divide by the number of hours that can be billed a year.This doesnt include sick days, holidays, and hours workings on the business, hours with no work and so on. All hidden costs must be factored. E.g. insurance, invoices that neer get paid for one reason or another, and taxes. 2. Profit The aim of every business is to make money. Profit is the target money one wants to make above breaking even. Profit is affected by the revenue generated which in turn depends on market price.3. Market Demand The concept of demand supply states that if what one does is in high demand, then make your services more expensive. Conversely if theres hardly any work around, then decide the market price based on competitors pricing strategy. Signs that demand are high include too much work coming in, other freelancers being overloaded and people telling you theyve been struggling to find someone to do the job.Signs that demand are low include finding yourself competing to win jobs, a shortage of work and fellow freelancers re-entering the workforce. 4. Industry Standards It is a technical standards used in business. It is based on the industry market price, value for money, services offered etc. in separate to fit in the market, one must adhere to industry standards. 5. Skill Level incompatible people, depending on the result they produ ce, possess a different skill level. When applies to companies, it implies that the market price must be commensurate with the companys skill.6. find out Although often bundled with skill, experience is a different factor altogether. Experience affects how much a company must charge. E.g. You may have two very talented photo charters, unless one with more experience might have better client skills, be able to foresee problems (and olibanum save the client time and money), and intuitively know whats going to work for a certain audience and so on. 7. Business Strategy Adopted Business strategy or run will make a huge difference to the pricing strategy.E.g. Think about the differences between Revlon and Chanel, the two could make the same perfume but you would never expect to pay the same for both. Pitching oneself in front of the target customers helps define a company as cheap and cheerful, high end or somewhere in between. This largely affects the market price as people are read y to pay a premium for high end goods. 8. Service Offered Services are an intangible equivalent of economic goods. Service provision is often an economic activity where the buyer does not generally, except by exclusive contract, obtain exclusive ownership of the thing purchased. The benefits of such a service, if priced, are held to be self-evident in the buyers willingness to pay for it. Public services are those societies as a whole pays through taxes and other means. The services that a company provides for its clients make a big difference to its price tag.For example you might be a freelancer, who will do whatever it takes to get a job just right, or peradventure you are on call 24-7, or perhaps you provide the minimum amount of communication to cut costs. Whatever the case, adjusting the pricing to the type and level of service provided is a must. 9. Market Segment Prices will often vary for different clients. This happens for a few reasons. Some clients require more effort, some are riskier, some are repeat clients, some have jobs you are dying to do, some you wouldnt want to go near with a stick. Thus these factors must be taken into account while pricing a commodity. rooted(p) cost A cost that does not change with an increase or decrease in the amount of goods or service produced. Fixed costs are expenses that have to be paid by a company, independent of business activity. It is one of the two components of the total cost of a good or service, along with variable cost. Fixed costs are defined as expenses that do not change as a function of the activity of a business, within the relevant period. E.g. rent, property tax, insurance, or fill expense.An example of a fixed cost would be a companys rent on a building. If a company has to pay $10,000 each month to cover the cost of the rent but does not manufacture anything during the month, the rent payment is still due in full. In economic science, a business can achieve economies of scale when it produ ces enough goods to spread fixed costs. For example, the $100,000 lease spread out over 100,000 widgets means that each widget carries with it $1 in fixed costs. If the company produces 200,000 widgets, the fixed cost per unit drops to 50 cents. Variable Costs A corporate expense that varies with production output. Variable costs are those costs that vary depending on a companys production volume they rise as production increases and fall as production decreases.Variable costs differ from fixed costs such as rent, advertising, insurance and office supplies, which tend to remain the same regardless of production output. Variable costs can include direct material costs or direct labor costs necessary to complete a certain project. For example, a company may have variable costs associated with the promotion of one of its products. Conversely, when fewer of these products are sold the costs for packaging will consequently decrease. Marketing Costs It is the amount of money spent on adv ertisement, distribution and selling of finished goods in the market. It has components of fixed and variable costs. It is difficult to obtain an estimate of the marketing cost. Hence, it is taken as a percentage of total costs and added to it.Total Costs Total costs (TC) describes the total economic cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as toil and raw materials, plus fixed costs, which are independent of the quantity of goods produced and include (capital) that cannot be vary in the short term, such as buildings and machinery. Total cost in economics includes the total opportunity cost of each factor of production as part of its fixed or variable costs. If one assumes that the unit variable cost is constant, as in cost-volume-profit analysis developed and used in cost accounting by the accountants, then total cost is linear in volume, and given by total cost = fixed costs + unit varia ble cost * quantity. prototype 4 Total Cost = Fixed Cost + Variable Cost taxation In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. Revenue may refer to business income in general, or it may refer to the amount, in a monetary unit, received during a period of time. Profit It is the difference between a slosheds total revenue and all costs. It is the positive gain from an investment or business operation after subtracting for all expenses. It is the opposite of loss. Profit = Total Revenue Total CostsProfit is the money a business makes after accounting for all the expenses. Regardless of whether the business is a couple of kids running a lemonade stand or a publicly traded multinational company, consistently earning profit is every companys goal. The path toward profitability can be long. For example, online bookseller Amazon.com was founded in 1994 and did not produce its first ann ual profit until 2003. Many take upups and new business fail when the owners run out of capital to sustain the business.Profit Before Tax A profitability measure that looks at a companys profile before the company has to pay corporate income tax. This measure deducts all expenses from revenue including interest expenses and operating expenses, but it leaves out the payment of tax. This measure combines all the companys profits before tax, including operating, non-operating, continuing operations and non-continuing operations. PBT exists because tax expense is constantly changing and taking it out helps to give an investor a good idea of changes in a companys profits or earnings from year to year.3.2 Data ProcurementData required for analysis* List of Assets* Cost Spent on assets at t=0* Useful life of each asset* Resale salvage price of each asset* Average repair and maintenance cost per year* Administrative cost per year* Fixed expenses incurred per year like rent, wages etc.* Var iable costs involved in rice production* criterion of rice, bran, husk produced* Unit price of raw material (paddy) and products (rice, bran, husk) The current asset price, useful life and salvage value was provided by Satake. elevate auxiliary A, put over 1.1.Data DescriptionEach asset has a list of the following variables (whichever is applicable) * total* Model type* faculty* Electrical Rating* Market PriceData required for analysis of Rice Husk Gassifier* List of assets* Cost Spent on assets at t=0* Useful life of each asset* Resale salvage price of each assetIt is obtained from various sites online. bring up appendage B, table 2.1.3.3 Specifications and AssumptionsSome specific data* Capital Expenditure incurred = Rs. 9,05,04,240* Capacity of Rice Mill = 4 tons per hour* Maximum Run = 270 days * 16 hours* yearly Requirement of Paddy at installed capacity = Capacity*Maximum Run = 17280 Metric Tonnes per year * The yield of rice isParticulars Yield Percentage Annual Yield (in MT) unprocessed Rice 65 11232Husk 21 3628.80Broken Rice 4 691.20Rice Bran 8 1382.40Rejected Rice 1 172.80Impurities 1 172.80* Price of Paddy in the market = Rs. 1250 per doppelzentner* Market Price of affectionate Rice = Rs. 2000 per centner* Market Price of Broken Rice = Rs. 1400 per quintal* Market Price of Bran = Rs. 1500 per quintal* Market Price of Husk = Rs. 320 per quintalAssumptions* The plant is assumed to run for 270 days (approximate value for the rice mill) for calculations pertaining to profitability of rice mill. * The salvage cost is unknown and is taken as 10% of total assets cost. * Quantity of raw rice produced = Quantity of raw rice sold. No inventory is utilized. * No wastage of products and byproducts.3.4 Solution ApproachPayback PeriodPayback PeriodInternal Rate of ReturnInternal Rate of ReturnNet Present ValueNet Present ValueSolutionsSolutionsNet Present Value* It is the algebraic sum of all cash flows pertaining to the project discounted to present t ime (t=0) at a chosen rate (i.e. Cost of Capital) NPV= -P+R-D1+in-1i*1+in+S11+inWhere,P = Cost of Asset spent at time t=0R = Revenue IncomeD = DisbursementsS = Resale Stock Salvage Valuei = Cost of Capitaln = Number of Periods (Useful life of asset)Internal Rate of ReturnThe 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) of all cash flows (both positive and negative) from a particular investment equal to zero.Payback PeriodIt is calculated by calculating Cumulative Cash unravel = (Net Cash Flow Year 1 + Net Cash Flow Year 2 + Net Cash Flow Year 3 etc.) Accumulate by year until Cumulative Cash Flow is a positive number that year is the payback year. k= ln(R-DR-D-P*i)ln(1+i)Where,K = Payback PeriodP = Cost of Asset spent at time t=0R = Revenue IncomeD = Disbursementsi = Cost of CapitalFor calculation of Profit obtainedProfit Function = Revenue generated Cost IncurredReve nue generated = (Qi*pi)Where,Qi = Quantity of commodity i sold per yearpi = Unit Price of commodity i in the marketCost Incurred = Fixed Costs (FC) + Variable Costs (VC)Refer addendum A, Table 1.3 and Table 1.4.Chapter 4 Results and sermons-Result 1For initial estimated values of input parameters* Initial cat Cost incurred at t=0 (P) = Rs. 90504240 (Refer Appendix A, Table 1.2) * Gross Revenue Income (R) = Rs. 266664960/year (Refer Appendix A, Table 1.4) * Operating Expenditure/ Disbursement (D) = Rs. 223860420/year (Refer Appendix A, Table 1.3) * Salvage Value /Resale Value (S) = Rs. 6707544,* Useful life of assets (n) = 20 years,* Cost of Capital (i) = 15%Figure 5 Cash Flow Diagram at estimated values of input parameters Refer Appendix A, Table 1.5.Using engineering economics equations (Refer Chapter 3, section 3.4 Solution Approach), we have found * NPV= -90504240+266664960-2435595801+0.1520-10.15*1+0.1520+670754411+0.1520 = Rs. 54529825.06 * IRR = 25.27% at NPV = 0* Payback p eriod, k= ln(266664960-243559580266664960-243559580-90504240*0.15)ln(1+0.15) =6.34 yearsFigure 6 C programme for calculating IRRRefer Appendix C.This is the C programme return to calculate the IRR of any cash flow correct upto two decimal places. This programme can be used for any type of cash flows.Result 2The following two graphs yield the relation of Cost of Capital with NPV and Payback Period.Figure 7 motion of Cost of Capital on NPVRefer Appendix A, Table 1.6.This graph helps obtain an estimate of the NPV based on the Cost of Capital. In order to get higher NPV, the Cost of Capital should be less. With a transition of 10% in the Cost of Capital, from 11% to 20% the NPV decreases substantially from 94 million INR to 22 million INR.Figure 8 Effect of Cost of Capital on Payback PeriodRefer Appendix A, Table 1.6This graph helps obtain the estimate of the Payback period based on the Cost of Capital. In order to get lesser Payback Period, the Cost of Capital should be less. With a variation of 11% in the Cost of Capital, from 10% to 20% the Payback Period increases substantially from 3.56 years to 10.95 years.DiscussionThe value of Cost of Capital is varied over a feasible range of 10% to 20% and the corresponding values of NPV and Payback period. If the Cost of Capital decreases, the NPV of the firm increases while the Payback Period of the firm will reduce as expected from the formulae of NPV and Payback Period Refer Chapter 3, section 3.4 Solution Approach.Result 3The following two graphs depict the relation of cost of unit amount of paddy(raw material cost) with NPV and IRR. 1 Unit = 1 centalFigure 9 Effect of unit Paddy Price on NPVRefer Appendix A, Table 1.7.This graph helps obtain an estimate of the NPV based on the cost of unit amount of paddy. The graph order of battles more or less a linear variation as expected. In order to get higher NPV, the cost of raw material should be less. A large variation could be seen in the NPV i.e. from 324 millio n INR to -216 million INR, when the price of paddy varies from one thousand INR per quintal to 1500 INR per quintal, keeping all other market price and other factors constant. In India, the Government of India fixes the minimum paddy price to save the interests of the farmers. So, if the price of the paddy goes above 1300 INR per quintal, the firm will not be beneficial at all instead will start incurring a loss.Figure 10 Effect of unit Paddy Price on IRRRefer Appendix A, Table 1.7In the graph the effect on IRR for different unit price of Paddy is shown. As the price of paddy increases from 1000 INR per quintal to 1350 INR per quintal, the IRR decreases substantially from 73.26% to 2.99% in eight uniform steps. DiscussionFor a fixed market price of Raw Rice, NPV and IRR decreases substantially with increase in unit price of Paddy. This is an obvious conclusion from the NPV equation Refer Chapter 3, section 3.4 Solution Approach. As the unit price of paddy rises, the operating cos t also starts increasing thus our annuity per year will decrease. With decrease in NPV and IRR, the payback period also increases.Result 4In the following two graphs the unit price of Raw Rice (product) is varied to see the effect on the NPV and IRR. 1 Unit = 1 hundredweightFigure 11 Effect of unit Raw Rice Price on IRRRefer Appendix A, Table 1.8This graph helps obtain the NPV of the firm based on the unit market price of Raw Rice. As the unit market price of Raw Rice increases, the Gross Revenue Income increases substantially which leads to increase in NPV. This graph shows linear variation with unit price of Raw Rice as expected. A large variation could be seen in the NPV i.e. from -191.5 million INR to -441.2 million INR, when the price of raw rice varies from 1650 INR per quintal to 2550 INR per quintal, keeping all other market price and other factors constant. With 1% increase in the unit market price of Raw Rice, the NPV of the firm increases substantially by 25.784%. If the unit market price of Raw Rice is above 1920 INR per quintal, the firm will be beneficial and below that price it will be running in loss.Figure 12 Effect of unit Raw Rice Price on IRRRefer Appendix A, Table 1.8In the graph, the variation of IRR for different unit market price of Raw Rice is studied. The unit market price of Raw Rice is varied in a feasible range of 1850 INR to 2550 INR, to estimate the effect on IRR. The IRR of the firm increases substantially from 3.71% to 93.79% in twelve uniform steps. This happens because as the unit market price of Raw Rice increases, the gross revenue income also increases which increases the IRR of the firm and reduce the payback period. DiscussionThe unit market price of Raw Rice is required to estimate the profit that can be earned. As the unit price of Raw Rice increases, the gross revenue income increases and thus the NPV and IRR of the firm increases substantially. If the revenue increases, the payback period of the firm will reduce. If the unit market price move beyond a certain point i.e. 1920 INR per quintal, the firm will start incurring loss. These graphs help in setting competitive market price of Raw Rice.Result 5The following two graphs show the effect of unit market price of Bran (byproduct) on the NPV and IRR of the firm. 1 Unit = 1 QuintalFigure 13 Effect of unit Bran Price on NPVRefer Appendix A, Table 1.9This graph helps obtain the NPV of the firm based on the unit market price of Bran. The NPV of the firm increases from 11.27 million INR to 141 million INR in fifteen equal steps assuming 50 INR hike in unit market price of Bran at every step. This graph shows linear variation with unit price of Raw Rice as expected. With 1% increase in the unit market price of Bran, the NPV of the firm increases substantially by 2.38%.Figure 14 Effect of unit Bran Price on IRRRefer Appendix A, Table 1.9Since with the increase in the unit market price of Bran the NPV of the firm increases, therefore IRR of the firm a lso increases. With 1% increase in the unit price of Bran the IRR increases about 0.24%. This graph shows more or less a linear variation. The IRR of the firm increases from 17.20% to 40.76% as the price of Bran increases from 1000 INR per quintal to 2500 INR per quintal. DiscussionThe unit market price of Bran, a byproduct, also has substantial effect on gross revenue income as it forms 8% part of the total conclusion which is about 1382.40 Metric tons. Today market price of Bran is about 1500 INR per quintal through which 20.736 million INR revenue is generated per year. Since, an increase in unit market price of Bran increases the gross revenue income, the NPV and IRR of the firm also increases. With increase in revenue, the payback period of the firm decreases.Result 6Figure 15 Effect of Salvage on NPVRefer Appendix A, Table 1.10Figure 16 Percentage change in NPV with percentage change in Salvage Value Refer Appendix A, Table 1.10Basic Assumption Salvage value is hard to define as it is the future value of 20 years down the line from now. Hence it is assumed to be certain percentage of the total assets cost. It is assumed to be 10% of the total assets cost incurred and is discounted to todays value at a rate of 15% to find the Net Present Value of the firm. The salvage value can vary over a range of 5% to 20% of the total assets cost. The NPV changes from -0.5% to 0.75% i.e. from 54.32 million INR to 54.94 million INR by changing the salvage value by -5% to 10% i.e. from 5% to 20% of the total assets cost. DiscussionThe NPV of the firm doesnt increases substantially with increase in the salvage value of the assets. The graph shows a straight line variation as expected. With 1% increase in salvage value the NPV increase by 0.075%. This increase in the NPV is negligible, therefore, even if the assumed resale value of the assets change in the future, it will not affect the calculations done in this case study for the profitability analysis of Jay Laxmi Rice mill.Result 7The following two graphs will help in assessing the economy of generating electricity from husk (by product) using Rice Husk Gassifier.Figure 17 Effect of percentage of Total electricity requirement that is substituted by Rice Husk Gasifier on NPVRefer Appendix B, Table 2.3The graph shows that the NPV of the firm increases linearly as the amount of electricity produced by the husk Gasifier increases as expected. The NPV of the firm increases from 51 million INR to 89 million INR as the amount of electricity that is substituted by the Rice Husk Gasifier increases from 65% to 100% of total electricity requirement. The minimum amount of total electricity that should be produced from husk so that the firm has the same NPV as before implanting the husk gasifier is 68.8%Figure 18 Effect of percentage of Total electricity requirement that is substituted by Rice Husk Gasifier on IRRRefer Appendix B, Table 2.3This graph shows the variation of the IRR of the firm with respect to the percentage of the total electricity requirement that is substituted by Rice Husk Gasifier. The graph shows an expected linear increase in IRR as the amount of electricity produced by the husk Gasifier increases. The IRR of the firm increases from 24.52% to 31.32% as the amount of electricity that is substituted by the Rice Husk Gasifier increases from 65% to 100% of total electricity requirement.DiscussionTo be economic at least 68.8% electricity requirement needs to be generated from Husk Gasifier i.e. the minimum amount of total electricity requirement that should be substituted by the Rice Husk Gasifier so that the firm profit as before setting up of the Rice Husk Gasifier.If the amount of electricity produced is more than this amount than the plant will earn more profit than before but if it is less, then the rice husk gasifier should not be set up, because the plant will be earning less than before. The plant may be beneficial but will be in loss as semblance to the curren t scenario. The following figure 19 shows the cash flow diagram when 68.8% of electricity requirement is generated from Husk Gasifier.Figure 19 Cash Flow diagram with Rice Husk GasifierRefer Appendix 8, Table 2.2Chapter 5 Summary and Conclusions-5.1 SummaryThe main aim of this study was was to analyze the Jay Laxmi Rice Mill, Bazpur in Udham Singh Nagar district in the state of Uttarakhand, from its business point of view. It has a nominal capacity of 4000kg/hr. It has been built for the production of raw rice. Some estimates were required to analyze its profitability. The economic analysis of the project was carried out using engineering economics equations.The sensitivity of NPV, IRR and Payback period with respect to various factors like Cost of Capital, paddy price, raw rice price, bran price and salvage were studied. Also the economy assessing of generating electricity from husk (by product) using Rice Husk Gassifier was done. The minimum electricity requirement that needs to b e generated from Rice Husk Gasifier for economic purposes was calculated. The following conclusions are draw from the study* For initial estimated values of input parameters (P = Rs. 90504240, R = Rs. 266664960/year, D= Rs. 223860420/year, S = Rs. 6707544, n = 20 years, i = 15%) * NPV = Rs. 54529825.06* IRR = 25.27%* Payback period = 6.34 years* With a variation of 10% in the Cost of Capital, from 11% to 20% the NPV decreases substantially from 94 million INR to 22 million INR and Payback Period increases from 4.03 increases to 10.95 years. * A large variation could be seen in the NPV i.e. from 324 million INR to -53.5 million INR, when the price of paddy varies from 1000 INR per quintal to 1350 INR per quintal while IRR increases from 73.26% to 2.99%. * NPV increases from -50.9 million INR to -441.2 million INR and IRR increases from 3.71% to 93.79%, when the price of raw rice varies from 1850 INR per quintal to 2550 INR per quintal.* As the price of Bran increases from 1000 INR p er quintal to 2500 INR per quintal, the NPV and IRR of the firm increases from 11.27 million INR to 141 million INR and 17.20% to 40.76% respectively. * With 1% increase in salvage value the NPV increase by 0.075%. This increase in the NPV is negligible, therefore, even if the assumed resale value of the assets change in the future, it will not affect the calculations done in this case study for the profitability analysis of Jay Laxmi Rice mill. * To be economic at least 68.8% electricity requirement needs to be generated from Husk Gasifier i.e. the minimum amount of total electricity requirement that should be substituted by the Rice Husk Gasifier so that the firm profit as before setting up of the Rice Husk Gasifier.References-* James L. Riggs 2004, Engineering Economics, 4th edition, Tata Mc Graw heap Education Private Limited, pp 67-147. * Chandra P. 2011, Fundamentals of Financial Management, 11th edition, Tata Mc Graw Hill Education Private Limited, pp 150-167. * T. Kapur, T. C. Kandpal and H.P. Garg, electrical energy Generation from Rice Husk in Indian Rice Mills Potential and Financial Viability, Indian Institute of Technology, New Delhi (1995). * Alexis Belonio, Victoriano Ocon, and Antonio Co, Garbage-In Fuel-Out Small-Scale Rice Husk Gasifier Plant for Community Street Lighting, Suki Trading Corporation, Philippines (2011). * e-mail from Gaurav Vashisht (gauravsatakeindia.com) working at Satake, kolkata.