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Chapter 4.11 - Performing Financial Analysis

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Selected questions Chapter 4.11: Financial Management Short type questions 1. What s the need for performing financial analysis of an energy saving proposal? Ans. Plant managements invest in capital which will yield the greatest return. In order to make a decision about any course of action, management needs to appraise all costs involved in appropriate manner in a project and determine the potential returns. 2. What are the financial issues associated with capital investment in energy saving project? Ans. The financial issues associated with capital investment in energy saving projects are from discounted cash-flow techniques like 1: : Net present value 2. 3. NPV IRR : Internal rate of return What are fixed and variable costs? Give an example of a diesel generator installation. Ans. Variable costs are those which vary directly with the output of plant or production-such as fuel costs. Fixed costs are those which are not dependent on plant or production output such as interest on capital, site rent or insurance. For example, capital cost & annual maintenance costs or fixed costs. Considering a DG installation, the fixed costs are manpower, interest on capital and depreciation costs. The variable costs are Fuel & lubricating oil costs. 4. What are two types of interest charges? Take the example of a boiler installation involving Rs 5.0 lakh investment @ 10% interest per anum with a repayment period of 5 years and compute the total repayment value for both simple interest method. Ans. The two ways of calculating interest are simple & compound interest. The total repayment value with simple interest = Rs (5.0+ (10/100*5.0*5)=Rs 7.5 lakh The total repayment value with compound interest = Rs. 5.0 x (1 + 10/100)5 = Rs. 8.05 lakh 5. What is profitability index? Give an example of motor having a capital investment of Rs 1.0 lakh with discounted net savings of Rs. 1.2 lakh? Ans. The technique used to evaluate the financial viability of projects is the profitability index. THIS IS GIVEN BY RATIO of Sum of discounted net savings and Capital costs = 1.2 / 1.0 * 100 = 120% 6. Explain the term depreciation Ans. This is the reduction in value of plant assts over life. It is not a real cash-flow but only a paper expense allocation and does not directly affect the life cost. But it is a real expense in terms of taxcalculations. 4.11 - Financial Management (table format) 66

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