zahid sohaib project

7/31/2019 Zahid Sohaib PROJECT

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SELECTION OF FAUJI CEMENTPLANT PROJECT THROUGH

CAPITAL BUDGETING

2012

ZAHID, SOHAIB FAUJI CEMENT

1/23/2012


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SELECTION OF FAUJI CEMENT PLANT PROJECT

THROUGH CAPITAL BUDEGETING

BY

ZAHID HUSSAIN (REG # 4295-FMS/MBA/F09)

SOHAIB SALEEM (REG # 4262-FMS/MBA/F09)

A Project report submitted to the Department of Accounting & Finance, Faculty

of Management Sciences, International Islamic University, and Islamabad with

requirement to fulfill the degree of

MASETR OF BUSINESS ADMINISTRATION

Department of Accounting & Finance

Faculty of Management Sciences

International Islamic University Islamabad


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Copyright2012 by Mr. Zahid Hussain and Mr. Sohaib Saleem

All rights are reserved. No part of this project report can be reproduced in any

form or any means such as photocopy or electronic media etc, without approval of

authors.


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Supervisors Certificate

This is certified that Mr. Zahid Hussain (Reg. No.4295-FMS/MBA/F09 ) and Mr.Sohaib Saleem (Reg. No.4262-FMS/MBA/F09) of MBA-22 have completed their

project report entitled Selection of Fauji Cement Plant Project through

Capital Budgeting under my supervision. I have checked this report and found

it bonafide work of authors.

__________________

Ch. Mazhar Hussain

SUPERVISOR

Assistant Professor

______________________

Dr. Zaheer Abbas

Head, Department of Accounting & Finance

Faculty of Management Sciences

International Islamic University Islamabad


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DEDICATION

I dedicate this project to my beloved parents, teacher and friends for keeping my

spirit high and for their love, support and guidance throughout my life.


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ACKNOWLEDGEMENTS

All Praise to Allah. First and foremost I thank Allah, the Generous, for having

finally made this effort a reality. I praise Him because if it were not for His

Graciousness, it would never materialize.

Im extremely grateful to my course supervisor CH. MAZHAR HUSSAIN who

spent a lot of valuable time with us and gave all the related information and

expertise very generously about related course.


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TABLE OF CONTENTS

Chapter No. 1

Executive Summary .... 13

Introduction .14

Objective .14

Company Profile .1 5

Company History . ...15

Business ... ...16

Vision ......1 6

Mission .... ....17 Strategies .....1 7

Values ......1 8

Statement of Corporate Governance ...1 9

Chapter No. 2

Capital Budgeting 20

Independent Project ... 20

Mutually Exclusive Project ....20

Capital Budgeting Process ... 22

Capital Budgeting Method ......23

Net Present Value .. 23

Profitability Index .. 24

Internal Rate of Return ... 24

Interpolation ... 25

Pay Back Period . 26

Weighted Average Cost of Capital 27

Cost of Equity ...... ..27

CAPM ... .28


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Chapter No. 3

New Line of Production Capacity ..30

Data Related to Project ..30

Assumptions .. 31

Calculation of WAAC .... 32

Cost of Equity ... 32

Cost of Debt . 33

Calculation of 22000M Project .. 34

Application of Capital Budgeting Technique .... 39

Interpolation .. .43


Profitability Index ...... 45

Calculation of 16100M Project .. 46

Application of Capital Budgeting Technique ........ 51

Interpolation ...55


Profitability Index .. 57 Selection of Project ........59

Chapter No 4

Conclusion ... ..60

References .. 61


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List of Tables

Calculations of 22000 M Project Tables

Net Cash Flow .. 35-37

Net Present Value ..39

Internal Rate of Return . 41-42


Calculation of 16100 M Project Tables

Net Cash Flow .. 47-49

Net Present Value . 51

Internal Rate of Return ..... 53-54

Pay Back Period .... 56

Comparison Chart ..58


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List of Graph

Cash flow graph of 22000M .. 38

Net present value . 40

Internal rate of return ..... 43

Cash flow graph of 16100M . 50

Net present value .. 52

Internal rate of return . 55


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Chapter No. 1

INTRODUCTION

Capital budgeting is the process through which companies make investment

decision. We use capital budgeting techniques to evaluate the project plant of

fauji cement. Fauji cement have two production plant project one of them is of

22000M and the other is of 16100.After the analysis and techniques used we

selected the project of 22000M for fauji Cement production.

OBJECTIVEThe objective of the study is

1. Evaluate the acceptability of an investment project using the net present

value method.

2. Evaluate the acceptability of an investment project using the internal rate

of return method.

3. Evaluate an investment project that has uncertain cash flows.

4. Rank investment projects in order of preference.

5. Determine the payback period for an investment.

6. Compute the simple rate of return for an investment.

7. Understand present value concepts and the use of present value tables.

8. Include income taxes in a capital budgeting analysis.

In this project we predict future cash flows of the fauji cement for the particular

time period we calculate the expected return generated from the production plant.We calculate the cost of capital and compared it with internal rate of return. We

use different capital budgeting technique to select the project.


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Company Profile

Since 19 years, they are giving the services for the Pakistan and its nation. Its a

long time leader in the cement manufacturing industry, Fauji cement company,

Main branch is located at Rawalpindi, and it is a headquartered, they operates a

cement plant T Jhang Bahter, Tehsil Fateh Jhang & district Attock in the province

of Punjab. More than 13 years company is producing valuable products in which

we can reliable and they are producing quality products for their consumer and

long standing traditions of services.

Fauji cement plant is one of the most efficient plants than all cements company.

This plant is best maintained in the country that is why they are producing 1.165

million tons of cement. By producing the high quality of cement, government also

preferred to use fauji cement in construction of Highways, Bridges, Commercial

& Industrial Complexes, Residential homes & other structures.

Company History

Fauji Cement Company is incorporated as a public limited company on 23 rd

November 1992, and it is sponsored by Fauji Foundation Company has achieved

the certificate of commencement of business on 22 nd May 1993. The primary

objective of the company is producing and selling ordinary Portland cement

(OPC). They have engaged local and foreign consultant for the purpose of

selection sound process technology, civil design, Art equipment and Project

monitoring.

The Fauji Cement Company has been made a contract with world renowned

cement plant manufactures M/s F.L Smidth to improve in design, engineering,

procurement, manufacturing, delivery, erection, installation, testing and

commissioning, art equipment, cement plant in all respects for the purpose of


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manufacturing. The contract has established on 1 st January 1994 and its start

working in August 1994. In 2005, the plant potential capacity was increased 3700

tons per day or 3.885 tons of cement per day.

BUSINESS

The Company has been set up with the primary objective of producing and selling

ordinary Portland cement. The finest quality of cement is available for all types of

customers whether for dams, canals, industrial structures, highways, commercial

or residential needs using latest state of the art dry process cement manufacturing

process.

VISION

To be a role model cement manufacturing Company, benefiting all stake holders

and fulfilling corporate social responsibilities while enjoying public respect and

goodwill.


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MISSION

While maintaining its leading position in quality of cement maximizes

profitability through reduced cost of production and enhanced market share.

STRATEGIES

We shall achieve our vision by maintaining high quality product, relentless

pursuit of customer satisfaction, empowering FCCL employees to lead cement

industry and achieve manufacturing excellence, producing superior returns to our

shareholders.


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STATEMENT OF CORPORATE GOVERNANCE

1. The company always encourages representation of independent non-

executive directors and directors representing less interest on its board of

directors.

2. All of the directors have confirmed already that no one is serving as a

director in more than ten listed companies including this company.

3. All the directors have confirmed that they are registered as tax payers &

none of them has defaulted in payment of loan to bank.

4. All the directors & employees have been signed on Statement of Ethics &

Business Practices which is prepared by the comp any.

5. All the powers of the board have been duly exercised & decisions on

material transactions.

6. The meetings of the board are fully conversant with their duties &

responsibilities as directors.

7. All the directors of the board are fully conversant with their duties and

responsibilities as directors.

8. The directors, CEO & executives do not hold any interest in the shares of

the company, other than that disclosed in pattern of share holding.

9. The company has setup an effective internal audit function.

10. The statutory auditors or the persons associated with them have not beenappointed to provide other services.


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CHAPTER 2

Capital Budgeting

It is defined as the process used to determine that the organizational long term

investment giving how much benefit or worth of the investment in future. This

method is used for long term major investment. Capital budgeting tells the

investor manager about the cash flow generated from this project; tell the net

present value and internal rate of return. We can select the best project from

different projects by using capital budgeting techniques. It is also known as

accounting rate of return or return on investment.

Following are the techniques used in capital budgeting.

Independent Project

A project whose cash flow has no impact on rejection or acceptance of other

project is known as independent project. Those projects who meet these criteria

are accepted.

Mutually Exclusive Projects

A project whose cash flow effect the other project is termed as mutually exclusive

projects. In these projects one project adversely affect the other project cash flow.

In mutual exclusive projects all projects are to accomplish the same task.

Therefore such projects cannot take simultaneously. In these projects there may

be one or more project accepted to complete the fast. The project should be

accepted on the basis of initial investment, time period; strategic importance etc.

Means the projects that increase the value of business in the long run mutual

exclusive projects can be accepted by using the net present value method.

Because these method is preferred over the other one.


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Following are the cash flows from projects.

These project A and B are mutually exclusive but project have initial investment

of 10000000 and the pattern of cash inflow is different so by the IRR project is

accepted while through NPV method shows B project is better than A.

In the above example cash out flow is different. Project B have some cash out

flow in future as compared to project A. By using NPV project A is to be selected.
http://www.capitalbudgetingtechniques.com/wp-content/uploads/2010/12/IRR-Example21.jpghttp://www.capitalbudgetingtechniques.com/wp-content/uploads/2010/12/IRR-Example3.jpghttp://www.capitalbudgetingtechniques.com/wp-content/uploads/2010/12/IRR-Example21.jpghttp://www.capitalbudgetingtechniques.com/wp-content/uploads/2010/12/IRR-Example3.jpg


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Capital Budgeting Methods

Many formal methods are used in capital budgeting, including the techniques suchas

Net present value

Profitability index

Internal rate of return

Pay Back period

Net Present Value

In this method the present value of cash flow is calculated and selection of project

depends upon the positive net present value. Actually in that method the net

present value of future cash inflows is calculate then differentiate it from cash

flow or out flow during a special period of time. With the help of this method an

investment that generates positive cash flow is accepted.

Steps Used In NPV Method

Estimate future cash flow from a project.

Calculate present value of this cash flow by discounting cash flow

procedure.

Differentiate net present value of the cash inflow with the cash out flow.

In NPV method it is assumed to be reinvested at the discount rate. If n is the

number of cash flow in the list of value, the formula is:


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PROFITABILITY INDEX

It is also known as value investment ratio & profit investment ratio. It is the ratioto tell the payoff of investment of a selected project. Actually this method tells the

value of project in units created by this project.

Following is the formula which is used for profitability index.

PROFITABILITY INDEX = PRESENT VALUE OF FUTURE CASH FLOW

INITIAL INVESTMENT

In this method Present value of Cash Flow is calculated for different time period.

Then using this formula we calculate Profitability Index.

Rules for selection & rejection of projects.

If Profitability Index is greater than 1 so project will be accepted.

If Profitability Index is less than 1 so project will be rejected.

INTERNAL RATE OF RETURN

The internal rate of return on an investment is the effective rate on which all cash

flows gives value equal to zero. In other words we can say that IRR of an

investment is the discount rate at which net present value of different time period

cash flows become equal to initial cash outflow.

The selection of the project is based on higher IRR. In case all the projects have

same amount of investment the selection of the project is based on highest IRR.

Normally the firm select the project whose IRR is greater than cost of capital.


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INTERPOLATION

Interpolation relies on simple proportionality arguments as follows. If items a, b,

c, d, and f are known, then e can be found by noticing that e is, in a proportion

sense, at the same relative position between d and f as b is between a and c. Thus,

even if the scale for the items below the line differs from the items above the line,

the fractions of the distances will be the same.

The interpolation process is only a close approximation of the true IRR. A more

accurate numeric search produces a resulting IRR The relationship between the

discount rate and the NPV is not linear, and thus the linear approximation

provided by the interpolation will not be exact. Of course, the wider the range of

values over which you interpolate the greater the potential degree of inaccuracy in

your answer. And, surprisingly, the error is usually greatest when the IRR is

approximately evenly bracketed by the end points; with the approximation

improving the closer the sought value is to one of the endpoints. Thus, it is more

important to get at least one of the endpoints to have an NPV near zero than to

find similar sized positive and negative values.

Interpolated Discount Rate = iL + (iH iL)(PV1 )

PVl -PVH


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PAY BACK PERIOD

Payback period method focus on time period to receive cash outflow or initialinvestment. It actually calculates the time require for an investment to pay itself.

The selection among the projects can be done on the basis of less time period

taken by project to recover its initial investment. Normally payback period is

expressed in years when project have same cash flow.

Following formula can be used to calculate Payback period

Pay Back Period=Initial Investment

Annual Cash Flow Amount


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Weighted average cost of capital (WACC):

Weighted average cost of capital is what overall firm beard in capturing the totalfinance for firm. You may call it as the calculation of the discount rate. The

simple method to calculate the WACC is cost of debt multiplied with weight of

debt plus cost of equity multiplied with weight of equity.

Formula;

WACC= (Cost of debt)*(weight of debt) + (cost of equity)*(weight of equity)

WACC is the appropriate choice of business valuation

Cost of Equity;

Cost of equity means cost which is beard by firm for getting finance through

equity. We calculate the cost of equity of Pakistan Tobacco Company by using

Dividend Discount Model. Reason for selecting this model is negative return in

market. CAPM is applied when Return in market is greater than Risk free rate.

A return which is company pays to the equity investor for compensating investorbecause he is taking risk in company capital. There are various methods for

calculating the cost of equity

Dividend discount model

Capital Asset Pricing Model

Bond Yield Model


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Definition of 'Capital Asset Pricing Model - CAPM'

A model that describes the relationship between risk and expected return and that

is used in the pricing of risky securities.

The general idea behind CAPM is that investors need to be compensated in two

ways: time value of money and risk. The time value of money is represented by

the risk-free (RF) rate in the formula and compensates the investors for placing

money in any investment over a period of time. The other half of the formula

represents risk and calculates the amount of compensation the investor needs for

taking on additional risk. This is calculated by taking a risk measure (beta) that

compares the returns of the asset to the market over a period of time and to the

market premium (Rm-rf).

A measure of the volatility, or systematic risk, of a security or a portfolio in

comparison to the market as a whole. Beta is used in the capital asset pricing

model (CAPM), a model that calculates the expected return of an asset based on

its beta and expected market returns


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Cost of Debt

The effective rate that a company pays on its current debt. This can be measured

in either before- or after-tax returns; however, because interest expense is

deductible, the after-tax cost is seen most often. This is one part of the company's

capital structure, which also includes the cost of equity.

A company will use various bonds, loans and other forms of debt, so this measure

is useful for giving an idea as to the overall rate being paid by the company to use

debt financing. The measure can also give investors an idea as to the riskiness of

the company compared to others, because riskier companies generally have a

higher cost of debt.

To get the after-tax rate, you simply multiply the before-tax rate by one minus the

marginal tax rate (before-tax rate x (1-marginal tax)). If a company's only debt

were a single bond in which it paid 5%, the before-tax cost of debt would simply

be 5%. If, however, the company's marginal tax rate were 40%, the company's

after-tax cost of debt would be only 3% (5% x (1-40%)).


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CHAPTER 3

New Line of Production Capacity:

New line of production capacity 7200 TPD has been completed by Erection &

Commissioning and they have been started new production line. This plant has all

the latest technology & art equipment and it is going to enhance value addition in

Pakistan cement industry.

Major equipment suppliers are as follows.

A) POLYSIUS GERMANYB) LOESCHE GMBH GERMANY ( Vertical cement mills )

C) HAVOR & BOECKER GERMANY ( Packing plant )

D) ABB SWITZERLAND ( Electrical equipment & PLC )

For the new line production of 7200 TPD we have to evaluate two projects.

One Project has 22000 million initial cash outflow.

Second project have 16100 million cash outflow

Following are the data is related to Fauji Cement Plant Project.

Initial investment = 22 Billion

Tax Rate = 35%

Debt to Equity Ratio = 0.55

Depreciation = 4%

Average Capacity Utilization = 80%

Average Sale Increase = 12%

Average Price Per Ton = 3645


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ASSUMPTIONS

It is assumed that sale with increase in the following manner with respect

to previous years.

1 to 10 years - 12%

11 to 15 years - 9%

16 to 25 years 6%

Further assumed that the capacity utilization of plant is 80%Tax must be applied at the rate of 35%.

Depreciation is charged at the rate of 4% for the whole life of plant.

Admin & selling expenses is charged at the rate of 3.9% of sales.

Cost of goods sold is applied at the rate of 70% of sales.

Average interest rate is applied 13.5%.

Gross profit is 30% of the sales.


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CALCULATION OF WAAC

For calculation of weighted average cost of capital we first have to determinethe

Cost of equity ke

Cost of Debt Kd

Weight of equity

Weight of debt

Capital sources Amount Weight

common equity 9,900,000,000 0.45

Debt 12,100,000,000 0.55

Total 22,000,000,000 0.1

Cost of Equity

By using capital asset pricing model we have determined:

Risk free Rate=0.1180

Market Rate=0.001

Beta=1.08

By putting these values in the formula we get:

CAPM=RF+ ( Rm-Rf)

CAPM=0.1180+1.08(0.001-0.1180)

CAPM=0.1180+ (-0.1263)

CAPM= -0.0083


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Cost of Debt

Kd= Ki (1-Tax Rate)

Kd= 0.135(1-0.35)

Kd = .0.135(0.65)

kd =0.087

Now, putting all those values in WAAC

WACC= Ke*We+ Ki*Wd

WACC =-0.0083*.45+0.087 *0.55

WACC = -0.0037+0.0478

WACC = 0.044 or 4.4%


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FAUJI CEMENT

CALCULATION OF22OOOMPROJECT


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Calculations of Net Cash Flow

rs 2012 2013 2014 2015 2016 2017 201s 6.62E+09 7.42E+09 8.31E+09 9.302E+09 1.042E+10 1.167E+10 1.307E+10s Million 6620.82 7415.32 8305.155 9301.774 10417.99 11668.14 13068.32S C.G.S 4647.815 5205.553 5830.219 6529.8452 7313.4266 8191.0378 9173.9623ss Profit 1973.004 2209.764 2474.936 2771.9286 3104.56 3477.1072 3894.3601S A & Senses 262.1844 293.6466 328.8841 368.35024 412.55227 462.05854 517.50557rating Income 1710.82 1916.118 2146.052 2403.5783 2692.0077 3015.0487 3376.8545S Depreciation 880 880 880 880 880 880 8T 830.8196 1036.118 1266.052 1523.5783 1812.0077 2135.0487 2496.8545S Interest 1633.5 1633.5 1633.5 1633.5 1633.5 1633.5 1633.

T -802.68-

597.3821-

367.4479 -109.9217 178.50774 501.54867 863.3545

S TAX -280.938 -209.0837 -128.6068 -38.47258 62.477708 175.54203 302.1740

Flow -521.742-

388.2983-

238.8411 -71.44908 116.03003 326.00663 561.1804Depreciation 880 880 880 880 880 880 8

T CASH FLOW 358.258 491.702 641.1589 808.5509 996.03 1206.007 1441.18


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Calculations of Net Cash Flow

s 2020 2021 2022 2023 2024 2025 2026 201.64E+10 1.8E+10 2.1E+10 2.2E+10 2.4E+10 2.66E+10 2.9E+10 3.164E+1

Million 16392.9 18360 20563 22414 24431 26630 29026.7 31639.1S C.G.S 11507.82 12888.8 14435.4 15734.6 17150.7 18694.27 20376.8 22210.66s Profit 4885.085 5471.3 6127.85 6679.36 7280.5 7935.745 8649.96 9428.458S A & Snses 649.159 727.058 814.305 887.592 967.476 1054.549 1149.46 1252.909ating Income 4235.926 4744.24 5313.55 5791.77 6313.02 6881.196 7500.5 8175.549S Depreciation 880 880 880 880 880 880 880 8T 3355.926 3864.24 4433.55 4911.77 5433.02 6001.196 6620.5 7295.549S Interest 1633.5 1633.5 1633.5 1633.5 1633.5 1633.5 1633.5 1633.

1722.426 2230.74 2800.05 3278.27 3799.52 4367.696 4987 5662.049S TAX 602.8492 780.758 980.016 1147.39 1329.83 1528.694 1745.45 1981.717

Flow 1119.577 1449.98 1820.03 2130.87 2469.69 2839.002 3241.55 3680.331Depreciation 880 880 880 880 880 880 880 8CASH FLOW 1999.58 2330 2700 3010.9 3349.7 3719 4121.55 4560.33


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Graph of Cash Flow

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

1 3 5 7 9 11 13 15 17 19 21 23 25

Cash Flows

Years


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Application of Capital Budgeting Techniques

Years Net Cash Flow Discount Rate @ 4.4% NPV Millions

2012 358.2577297 1.044 343.1587452013 491.7016572 1.08 455.2793122014 641.1588561 1.13 567.3972182015 808.5509188 1.18 685.2126432016 996.0300291 1.24 803.2500232017 1206.006633 1.29 934.8888622018 1441.180429 1.35 1067.541062019 1704.57508 1.41 1208.9185

2020 1999.57709 1.47 1360.256522021 2329.97934 1.53 1522.862312022 2700.029861 1.6 1687.518662023 3010.872299 1.67 1802.917542024 3349.690555 1.75 1914.108892025 3719.002455 1.82 2043.407942026 4121.552426 1.9 2169.238122027 4560.331895 1.99 2291.62407

2028 4879.178309 2.07 2357.090972029 5217.155507 2.17 2404.219132030 5575.411337 2.26 2466.996172031 5955.162518 2.36 2523.373952032 6357.698769 2.47 2573.967112033 6784.387195 2.57 2639.839382034 7236.676927 2.69 2690.214472035 7716.104042 2.81 2745.94452036 8224.296785 2.93 2806.92723

SUM OF PV 44066.1533CASH OUT FLOW 22000

NPV 22066.153


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Graph of NPV

0

10000

20000

30000

40000

50000

60000

1% 2% 3% 4% 5% 6% 7% 8%

NPV

NPV


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Firstly we are calculating at lower discount rate which is5%

YearsNet Cash

FlowDiscount Rate @

5%NPV

Millions2012 358.2577297 1.05 341.1978382013 491.7016572 1.1 447.0015072014 641.1588561 1.15 557.529442015 808.5509188 1.21 668.22392016 996.0300291 1.27 784.2756132017 1206.006633 1.34 900.004952018 1441.180429 1.4 1029.41459

2019 1704.57508 1.47 1159.574882020 1999.57709 1.55 1290.049742021 2329.97934 1.62 1438.258852022 2700.029861 1.71 1578.964832023 3010.872299 1.79 1682.051562024 3349.690555 1.88 1781.75032025 3719.002455 1.97 1887.818512026 4121.552426 2.07 1991.088132027 4560.331895 2.18 2091.895362028 4879.178309 2.29 2130.64555

2029 5217.155507 2.4 2173.814792030 5575.411337 2.52 2212.464822031 5955.162518 2.65 2247.231142032 6357.698769 2.78 2286.9422033 6784.387195 2.92 2323.420272034 7236.676927 3.07 2357.223752035 7716.104042 3.22 2396.30562036 8224.296785 3.38 2433.2239


NPV 18190.3718


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Secondly we are calculating at higher discount rate which is 10%

Years Net Cash Flow Discount Rate @ 10% NPV Millions

2012 358.2577297 1.1 325.6888452013 491.7016572 1.21 406.3650062014 641.1588561 1.33 482.0743282015 808.5509188 1.46 553.8019992016 996.0300291 1.61 618.6521922017 1206.006633 1.77 681.3596792018 1441.180429 1.94 742.876512019 1704.57508 2.14 796.5304112020 1999.57709 2.35 850.8838682021 2329.97934 2.59 899.605923

2022 2700.029861 2.85 947.3788992023 3010.872299 3.13 961.9400312024 3349.690555 3.45 970.9247992025 3719.002455 3.79 981.2671392026 4121.552426 4.17 988.3818772027 4560.331895 4.59 993.5363612028 4879.178309 5.05 966.1739222029 5217.155507 5.55 940.0280192030 5575.411337 6.11 912.5059472031 5955.162518 6.72 886.184898

2032 6357.698769 7.4 859.1484822033 6784.387195 8.14 833.46282034 7236.676927 8.95 808.5672542035 7716.104042 9.84 784.1569152036 8224.296785 10.83 759.399518


NPV -2049.1044


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Pay Back Period = a + (b c)

DPay Back Period = 16 + (24074.35-21717.25)/ 22000

Pay Back Period= 16.11 years

PAY BACK PERIOD

Years Initial CF NPV Accumulative CF0 22000M1 343.15872 455.2793 798.43805723 567.3972 1365.8352754 685.2126 2051.0479185 803.25 2854.2979426 934.8889 3789.1868047 1067.541 4856.7278628 1208.918 6065.6463599 1360.257 7425.902882

10 1522.862 8948.76519611 2547.198 11495.9631812 1802.918 13298.8807213 1914.109 15212.9896114 2043.408 17256.3975515 2169.238 19425.6356716 2291.624 21717.2597417 2357.091 24074.35071

18 2404.219 26478.5698419 2466.996 28945.5660120 2523.374 31468.9399521 2573.967 34042.9070722 2639.839 36682.7464423 2690.214 39372.9609124 2745.944 42118.9054125 2806.927 44925.83264


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PROFITABILITY INDEX

Profitability Index = Net Cash Inflows

Cash Out Flow

Profitability Index = 44066.15

22000



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FAUJI CEMENT

CALCULATION OF16100M PROJECT


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Calculation of Net Cash Flow

Years 2028 2029 2030 2031 2032 2033 Sales 2.34E+10 2.48E+10 2.63E+10 2.787E+10 2.955E+10 3.132E+10 3.32E

Sales Million 23402.98 24807.16 26295.59 27873.329 29545.729 31318.473 33197.C.G.S 16428.9 17414.63 18459.51 19567.077 20741.102 21985.568 23304.Gross Profit 6974.089 7392.535 7836.087 8306.2522 8804.6273 9332.9049 9892.8Admin Selling Expenses 926.7582 982.3637 1041.306 1103.7838 1170.0109 1240.2115 1314.6Operating Income 6047.331 6410.171 6794.781 7202.4683 7634.6164 8092.6934 8578.Depreciation 644 644 644 644 644 644EBIT 5403.331 5766.171 6150.781 6558.4683 6990.6164 7448.6934 7934.Interest 1195.425 1195.425 1195.425 1195.425 1195.425 1195.425 1195.EBT 4207.906 4570.746 4955.356 5363.0433 5795.1914 6253.2684 6738TAX 1472.767 1599.761 1734.375 1877.0652 2028.317 2188.6439 2358.5Net Flow 2735.139 2970.985 3220.982 3485.9782 3766.8744 4064.6245 4380.2Add Depreciation 644 644 644 644 644 644NET CASH FLOW 3379.139 3614.985 3864.982 4129.9782 4410.8744 4708.6245 5024.2


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Graph of Net Cash Flow

0

1000

2000

3000

4000

5000

6000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Cash Flows

Years


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Firstly we are calculating at lower discount rate which is 5%

Years Net Cash FlowDiscount Rate @

5% NPV Millions

2012 421.4023885 1.05 401.33560812013 518.7052523 1.1 471.55022942014 625.7384025 1.15 544.120352015 743.4748678 1.21 614.44203952016 872.9849796 1.27 687.38974772017 1015.446103 1.34 757.79559892018 1172.153338 1.4 837.25238412019 1344.531297 1.47 914.64714052020 1534.147051 1.55 989.77229112021 1742.724381 1.62 1075.7557912022 1972.159444 1.71 1153.3096172023 2174.0623 1.79 1214.5599442024 2392.117384 1.88 1272.4028642025 2627.616875 1.97 1333.8156722026 2881.956325 2.07 1392.2494322027 3156.642931 2.18 1448.0013442028 3379.139082 2.29 1475.6065862029 3614.985001 2.4 1506.2437512030 3864.981677 2.52 1533.722888

2031 4129.978152 2.65 1558.4823222032 4410.874416 2.78 1586.6454732033 4708.624456 2.92 1612.5426222034 5024.239499 3.07 1636.5600972035 5358.791444 3.22 1664.2209452036 5713.416505 3.38 1690.359913


NPV 13272.78465


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Secondly we are calculating at higher discount rate which is 10%

Years Net Cash Flow Discount Rate @ 10% NPV Millions2012 421.4023885 1.1 383.09308042013 518.7052523 1.21 428.68202672014 625.7384025 1.33 470.48000192015 743.4748678 1.46 509.22936152016 872.9849796 1.61 542.22669542017 1015.446103 1.77 573.6983632018 1172.153338 1.94 604.20275142019 1344.531297 2.14 628.28565262020 1534.147051 2.35 652.8285324

2021 1742.724381 2.59 672.86655652022 1972.159444 2.85 691.985772023 2174.0623 3.13 694.58859432024 2392.117384 3.45 693.36735772025 2627.616875 3.79 693.30260552026 2881.956325 4.17 691.11662462027 3156.642931 4.59 687.72177142028 3379.139082 5.05 669.13645182029 3614.985001 5.55 651.3486489

20303864.981677 6.11 632.5665592

2031 4129.978152 6.72 614.58008222032 4410.874416 7.4 596.06411032033 4708.624456 8.14 578.45509292034 5024.239499 8.95 561.36754172035 5358.791444 9.84 544.59262642036 5713.416505 10.83 527.5546173


NPV -1106.658524


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INTERPOLATION

Interpolated Discount Rate = iL + (iH iL)(PV1 )

PVl -PVH

Interpolated Discount Rate = 0.05 + (0.10 0.05) (13272.78)

13272.78 (-1106.65)

Interpolated Discount Rate= 0.05 + 463.63

14379.43

Interpolated Discount Rate= 0.082 OR 8.2%

IRR GRAPH

-15000-10000

-5000

0

5000

10000

15000

20000

25000

30000

35000

2% 4% 6% 8% 10% 12% 14% 16%

IRR

IRR


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Pay Back Period = a + (b c)

D

Pay Back Period = 16 + (17644.03-16011.60)/ 16100

Pay Back Period=16.10

PAY BACK PERIOD

YearsInitialCF NPV Accumulative CF

0 22000M1 403.6422 480.283 883.92477563 553.751 1437.6755744 630.063 2067.7390225 704.02 2771.7591666 787.168 3558.9266887 868.262 4427.1884198 953.568 5380.756715

9 1043.64 6424.39416510 1139.04 7563.42970811 1232.6 8796.02936112 1301.83 10097.8630713 1366.92 11464.7872914 1443.75 12908.5328315 1516.82 14425.3519516 1586.25 16011.6046817 1632.43 17644.0390118 1665.89 19309.9307219 1710.17 21020.099620 1749.99 22770.0903521 1785.78 24555.8694622 1832.15 26388.0190623 1867.75 28255.7660824 1907.04 30162.809325 1949.97 32112.7808


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PROFITABILITY INDEX

Profitability Index = Net Cash Inflows

Cash Out Flow


16100



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Comparison Chart

Techniques Project A Project B

NPV 22066.15M 16012.78M

IRR 9.4% 8.2%

PB 16.11 16.10

PI 2.003 1.99

WACC 4.4% 4.4%


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Selection of Project

Through the analysis of capital budgeting we predict project A should be selected.

We selected the project on the basis of two capital budgeting techniques NPV and

IRR.As shown in the above table that NPV and IRR of project A is higher than

project B. So project A is more reliable for production.

Moreover project A plant which has a cost of 22000M Which they are going to

buy from Germany. They are the major supplier to manufacturing of cement

.Fauji cement has another option to buy Project B plant from China. This plant is

not reliable because there may be of chance that cash outflows will incur during

the life of plant.

In the project A NPV is positive, which encourages fauji cement to accept the

project because adopting this project will add positive value of 22066.15.

The IRR for this project A is 9.4% which is well above the required rate of return

which is 4.4% of the project, so under taking this project will certainly generatehuge profits for the fauji cement.


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CONCLUSION

We have completed the capital budgeting analysis of Fauji Cement for the

selection of the production plant project. We used required rate of return based on

the weighted average cost of capital used by Fauji Cement to make its investment

decisions. After going through the whole project we have been able to analyze

how companies make investment decision using capital budgeting techniques. We

also analyze how mutually exclusive projects affects the cash flows of each other.

From the capital budgeting project we learned how every activity of business

affect the investment decision of the company and without the clear analysis of

statement we cannot make effective investment decision .It is not possible for any

investment decision that cash flows receives is according to the estimated cash

flows there may be difference in it. But capital budgeting techniques provides

some indication about the investment future cash flows on the basis of previous

performance of business.


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REFERENCES

www.fauji cement.com

www.investor pedia.com

Wikipedia

Financial Management by James C van Horne

Fundamental of Financial Management by Brigham

Financial Reporting and Management Accounting by

William J.B

Annual Reports of Fauji Cement

Mr.Attiq Asist.Manager Finance (Fauji Cement)

Contact # 0314-5154440

zahid sohaib project

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