A STUDY ON FINANCIAL VIABILITY OF INTRODUCTION OF BUS ROUTES OF BANGALORE METROPOLITAN TRANSPORT CORPORATION

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1 A STUDY ON FINANCIAL VIABILITY OF INTRODUCTION OF BUS ROUTES OF BANGALORE METROPOLITAN TRANSPORT CORPORATION Vinay H V, Assistant Professor, R N S Institute of Technology, Bengaluru Dr G V Kesava Rao, Professor & Dean R & D, R N S Institute of Technology, Bengaluru Abstract The paper is titled A Study on Financial Viability of Introduction of Bus Routes of Bangalore Metropolitan Transport Corporation i.e. K-6 Route. The research will help the company to know the profitability of the K- 6 route, i.e. to ascertain whether the K-6 route is Financially Viable or not. The main objective of the study is to evaluate feasibility of K-6 Route. To achieve this above objective the tools and techniques used is Capital budgeting Techniques, which is a quantitative tool used to check profitability of the route. Each Depot has to be converted in to a profit center, in their operations so that each division will earn profit. There is no proper maintenance of its total asset, like buses. So it has to appoint the qualified skilled labor or mechanics so that repair and maintenance cost will be reduced. Bangalore Metropolitan Transport Corporation (BMTC) is enjoying the distinction of best performance mass transport system in India. BMTC has maintaining good quality of the services and active involvement of the company personnel with the entire activity made it reputed across the country. Key Words: Scenario Analysis, Financial Viability, Capital Budgeting Introduction: Financial viability is the ability of an entity to continue to achieve its operating objectives and fulfill its mission over the long term. Financial viability is about being able to generate sufficient income to meet operating. Assessment of financial viability is an integrated process involving a review of a provider s audited financial financial statements for the previous financial year. Financial viability can be defined as a business ability to generate sufficient income to meet its operating expenses and financial obligations, as well as providing the potential for future growth. Reviewing the current performance level and financial position of your business and considering statements, Financial Performance the future will allow you to determine its Reports, business plan and other financial viability. In assessing financial information that supports financial viability, both short term and longer term analysis. The initial focus of the financial viability assessment is a provider s audited viability are taken into account. The financial viability of a provider is largely

2 assessed from information generated by the Financial Performance Report. Linked with the business plan, the report is a powerful tool for the assessment of FINANCIAL PERFORMANCE provider performance and the impact of REPORT: future decisions on viability of A financial performance report is used to assess the viability of k-6 route. The report introduction of new bus route i.e. k-6 route. reviews provider performance measures. STAGES COVERED IN K-6 ROUTE Sl. No STAGES 1 Kalyana Nagar Bus Stand 2 Kammanahalli 3 Subbaiahnapalya/Ayyappa Temple 4 Maruthi Seva Nagar 5 ITC Factory 6 Coles Park 7 Cunningham Road / CSI 8 Shivajinagar Bus Station 9 M.G.Statue 10 Rajaram Mohan Roy Circle/Richmond Circle 11 Hombegowdanagar Police Station 12 Ashoka Pillar 13 Jayanagara Bus Station 14 Jayanagara 5th Block 15 Jn.of 24th Main & 9th Cross (J.P.N. 1st Phase) 16 Vinayakanagar 17 Kothanur Dinne 18 Jambu Savari Dinne Bangalore city with a social frame in its STATEMENT OF THE PROBLEM operation of lots due to its survival. It has BMTC a premier road transport taken up new modern strategies to compete corporation under the government of Karnataka state has been serving the in a market. So this study on the financial viability of introduction of new bus routes

3 of BMTC (i.e. k-6 route) reveals the effect on revival strategies on its bottom line strengths etc OBJECTIVES OF THE STUDY To study the viability of introducing a new bus route i.e. k-6. To ascertain the cash flows associated and identify the expected profit for the current year. To conduct a scenario analysis of k-6 bus route. SCOPE OF THE STUDY The study is conducted at BMTC Bangalore Metropolitan Transport Corporation in Bangalore. The study aims to evaluate the financial performance of new bus route i.e. k-6 using various tools and technique. The data has been tabulated. Each data has been analyzed and evaluated. The findings are recorded and conclusions are given based on findings. Assumptions: If 1 bus runs for 200Kms every day on an average for 320 days per year. Then 1 bus would run around 64000Kms per year. Life of the bus is 9 years. Revenues will grow at rate of 35% for First three years (Introduction and Growth Stage), 25% growth for Next three years (Maturity Stage) and 15% growth for Last three years (Decline Stage). Discounting Factor is assumed at 10%. FACTS: Tax rate on Passenger vehicles is 5%. Average life of Swaraj Mazda Bus is 5.60 lakh kms. Scrap value of a Swaraj Mazda Bus is 1.60 lakh Rupees. Straight Line Method of Depreciation is followed by BMTC. TECHNIQUES USED FOR ANALYSIS 1. Capital Budgeting 2. Scenario Analysis Literature Review: Brigham and Ehrhardt A central feature of any investment analysis is DCF, which takes into consideration the time value of money, is regarded as theoretically correct, and includes at least four different discounting models: NPV, IRR, modified internal rate of return (MIRR), and profitability index (PI). Boquist & Adams Capital budgeting should be a sequential, multiple decision process that integrates the information needed to obtain cash flow estimates into the financial analysis of the cash flows. It is linked to the strategy implementation in relation to the company s multiple stakeholders.

4 Therefore, project proposals should be supported by relevant non-financial data and forecasts. It recognizes the options inherent in value-enhancing capital budgeting. Saaty Prueitt & Park The normative approach represents the traditional theory on capital budgeting presenting rules on which basis the enterprise can make an investment decision. According to this approach the emphasis is on the financial evaluation and Table 1.1: Showing Determination of CFAT selection of the long term-investment in assets, and the development of advanced capital budgeting techniques and their application in various situations are key issues. ANALYSIS AND INTERPRETATION FIRST SCENARIO, ASSUMPTIONS Revenues will grow at rate of 35% for First three years, 25% growth for Next three years and 15% growth for Last three years. Expenses will grow at the rate of 15% throughout the period. PARTICULARS Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 REVENUE LESS:EXP EBDT LESS: DEP EBT TAX (5%) EAT CFAT Growth rates Payback Period (PBP) Post Pay Back Profitability Post Pay Back Profitability Index Growth rate of Expenses 15% Years Rs Times Accounting Rate of Return (ARR) 96.84% Net Present Value (NPV) Profitability Index (PI) Rs Times

5 Pay Back Period (i.e years) is less than the life of the bus (i.e. 9 years) but it is more than the half of the life of the bus (i.e. 4.5 years) therefore it is not feasible. PPBP indicates the Cash inflows after recovering the Initial Investment. Since, the Cash flow after the Pay Back Period is Positive the project is feasible and can be accepted. Post Pay Back Profitability Index is more than one (i.e. PPBP is more than the Initial Investment). The project is feasible and can be accepted. Average Income is less than the Average Investment. Hence, the project is not feasible. Net Present Value is Positive (the Present Value of Cash Inflow is more than the Cash Outflow). Hence, the project is feasible. Profitability Index is more than one (i.e. Total future cash flow is 2.8 times more than the Initial Investment). The project is feasible and can be accepted. SECOND SCENARIO, ASSUMPTIONS Revenues will grow at rate of 35% for First three years, 25% growth for Next three years and 15% growth for Last three years. Expenses will grow at the rate of 12% throughout the period Table 1.2: Showing Determination of CFAT PARTICULARS Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 REVENUE LESS:EXP EBDT LESS: DEPR EBT TAX(5%) EAT CFAT

6 Growth rates Payback Period (PBP) Post Pay Back Profitability Post Pay Back Profitability Index Growth rate of Expenses 12% Years Rs Times Accounting Rate of Return (ARR) % Net Present Value (NPV) Profitability Index (PI) Rs Times Pay Back Period (i.e years) is less than the life of the bus (i.e. 9 years) and also less than the half of the life of the bus (i.e. 4.5 years) therefore it is feasible. PPBP indicates the Cash inflows after recovering the Initial Investment. Since, Post Pay Back Profitability Index is more than one. The project is feasible and can be accepted. Post Pay Back Profitability Index is more than one (i.e. PPBP is more than the Initial Investment). The project is feasible and can be accepted. Average Income is more than the Average Investments made. Hence, the project is feasible. Net Present Value is Positive (the Present Value of Cash Inflow is more than the Cash Outflow). Hence, the project is feasible. Profitability Index is more than one (i.e. Total future cash flow is 3.87 times more than the Initial Investment). The project is feasible and can be accepted. THIRD SCENARIO: ASSUMPTIONS Revenues will grow at rate of 35% for First three years, 25% growth for Next three years and 15% growth for Last three years. Expenses will grow at the rate of 12% throughout the period.

7 Table 1.3: Showing DeterminationofCFAT PARTICULARS Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 REVENUE LESS:EXP EBDT LESS: DEP EBT TAX (5%) EAT CFAT Growth rates Payback Period (PBP) Post Pay Back Profitability Post Pay Back Profitability Index Growth rate of Expenses 10% Years Rs Times Accounting Rate of Return (ARR) % Net Present Value (NPV) Profitability Index (PI) Rs Times Pay Back Period (i.e years) is less than the life of the bus (i.e. 9 years) and also less than the half of the life of the bus (i.e. 4.5 years) therefore it is feasible. PPBP indicates the Cash inflows after recovering the Initial Investment. Since, Post Pay Back Profitability Index is more than one. The project is feasible and can be accepted. Post Pay Back Profitability Index is more than one (i.e. PPBP is more than the Initial Investment). The project is feasible and can be accepted. Average Income is more than the Average Investment. Hence, the project is feasible.

8 Net Present Value is Positive (the Present Value of Cash Inflow is more than the Cash Outflow). Hence, the project is feasible. Profitability Index is more than one (i.e. Total future cash flow is 4.52 SUMMARY OF ANALYSIS times more than the Initial Investment) The project is feasible and can be accepted. 1 st scenario 2 nd scenario 3 rd scenario Growth rates Growth rate of Expenses 15% Growth rate of Expenses 12% Growth rate of Expenses 10% Payback Period (PBP) Years Years Years Post Pay Back Profitability Rs Rs Rs Post Pay Back Profitability Index Times Times Times Accounting Rate of Return (ARR) 96.84% % % Net Present Value (NPV) Rs Rs Rs Profitability Index (PI) Times Times Times FINDINGS BMTC is incurring a loss of Rs per kilometer in K-6 Route in the current situation. BMTC has witnessed 15% to 25% growth in its revenues in previous years. In and BMTC s revenues has grown 20% and 15% respectively. All the Capital Budgeting Techniques used for analysis indicate that the third scenario is better because the growth rate of expenses is assumed as 10% which is less then the other two scenarios. If we assume Pay Back Period should equal or lesser then half of the life of the bus, then Second Scenario (expenses growth rate 12% per annum) and Third Scenario (expenses growth rate 10% per annum) is feasible. Average Investments made is more than the Average Income earned in the First Scenario (expenses growth rate

9 15% per annum). Hence it is not feasible. CONCLUSION Bangalore Metropolitan Transport Corporation (BMTC) is enjoying the distinction of best performance mass transport system in India. BMTC has maintaining good quality of the services and active involvement of the company personnel with the entire activity made it reputed across the country. The company s infrastructure is excellent with good working condition which put employees at ease. The working position of the company is very good. The firm is maintaining too much cash reserves which have to be reduced and instead it should be invested in marketable securities. The analysis of the company s profitability relating to new K-6 route is done using techniques of Capital Budgeting like Pay Back Period, Post Pay Back Period Profitability Index, Accounting Rate of Return, Net Present Value and Profitability Index. Capital Budgeting Techniques is considered to be an important tool for analyzing the feasibility of the new project in terms of its Cash Inflows and Cash Outflows. From the analysis we can conclude that the Cash Inflows of the K-6 Route will be negative for first few years and thereafter, it will be positive till the life of the. References: 1. Chandra, Prasanna, (1975) Capital Expenditure Analysis in Practice, Indian Management. 2. George W. Kester, Rosita P. Chang, Eriinda S. Echanis, Shaiahuddin Haikal, Mansor Md. Isa, Michael T. Skuiiy, Kai-Chong Tsui, and Chi-Jeng Wang (1999), Capital Budgeting Practices in the Asia- Pacific Region: Australia, Hong Kong, Indonesia, Malaysia, Philippines, and Singapore Financial Practice & Education, Spring/Summer, Vol.9, Issue Graham, John R. and Harvey, Campbell R. (2001), The Theory and Practice of Corporate Finance: Evidence from the Field, Journal of Financial Economics, Volume 60, Issue Graham, John R. and Harvey, Campbell R. (2002), How Do CFOs make Capital Budgeting and Capital Structure Decisions?, Journal of Applied Corporate Finance. Volume Ioannis T Lazariids (2004), Capital Budgeting Practices: A Survey in the Firms in Cyprus, Journal of Small Business Management, 42 (4).

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