Accounting and Financial Management

Budget cycle is the full sequence of stages through which a budget passes from preparation to final review. In Nepal's government system it has four stages:

1. Preparation/Formulation — the Ministry of Finance issues a budget ceiling circular, ministries and departments prepare estimates, and the budget is finalised before presentation.
2. Approval/Enactment — the budget is presented in the Parliament (usually on 15 Jestha), discussed, and passed through the Finance Bill and Appropriation Bill.
3. Execution/Implementation — funds are released through the Financial Comptroller General Office, and spending is done as per the approved heads and programmes.
4. Review/Audit — internal audit, the Office of the Auditor General's final audit, and review by the Public Accounts Committee.

Major differences between a private enterprise budget and the government budget:

In short, the private budget is a profit plan of a single unit, while the government budget is a public policy instrument covering the entire economy.

(a) Net Present Value (NPV)

Net Present Value is the difference between the present value of all future cash inflows and the present value of all cash outflows of a project, discounted at the required rate of return (cost of capital). It measures the net addition to the firm's wealth if the project is undertaken.

$NPV = \sum_{t=1}^{n} \frac{CF_t}{(1+k)^t} - I_0$

where:

• $CF_t$ = expected cash inflow in year $t$
• $k$ = discount rate (cost of capital)
• $n$ = project life in years
• $I_0$ = initial investment (cash outflow at time 0)

Interpretation:

• $NPV > 0$ → project adds value; accept
• $NPV = 0$ → project breaks even; indifferent
• $NPV < 0$ → project destroys value; reject

(b) Role of NPV in project management decisions

1. Accept–reject decision: A positive NPV means the project earns more than the required rate of return, so it should be accepted; a negative NPV means it should be rejected. This gives a clear, objective decision rule.

2. Ranking of mutually exclusive projects: When only one of several projects can be chosen (e.g., two alternative transmission line routes), the project with the highest NPV is selected, since it adds the most value to the organization.

3. Capital rationing: When funds are limited (common in NEA where investment depends on approved capital budget), projects are ranked by NPV and funds are allocated to the highest-NPV projects first, maximising total value within the available capital.

4. Wealth maximisation objective: NPV is directly linked to the goal of maximising shareholder/entity wealth, as it measures value in absolute rupees. For a public utility like NEA, it shows whether the investment recovers its cost of capital and contributes surplus.

5. Time value of money: By discounting all cash flows, NPV correctly recognises that a rupee today is worth more than a rupee tomorrow, unlike payback period which ignores timing.

6. Use of full cash flow information: It considers all cash flows over the entire project life, including salvage value and working capital recovery, giving a complete picture of profitability.

Limitations: NPV requires an accurate estimate of the discount rate and future cash flows; it may not be suitable when projects have different scales or unequal lives without adjustment (e.g., equivalent annual annuity).

Conclusion: NPV is the most reliable capital budgeting technique because it is consistent with the wealth maximisation objective, accounts for the time value of money, and provides a clear accept–reject criterion for project management decisions.