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The detailed feasibility report of Establishing a Business of ZEST (Soft Drinks) in Karachi, Pakistan.

The detailed feasibility report of Establishing a Business of ZEST (Soft Drinks) in Karachi, Pakistan.

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  • 1. Feasibility Report On Zest Course: Financial Appraisal Class: M.Com Final (Finance) Group Number: 2 Faisal Arshad (08) Arsalan Aftab (20) Naresh Kumar (25) Umair Farooqi (42) Zeeshan Qayyum (50)
  • 2. Contents Page 2 of 51
  • 3. General Brief The feasibility report is about the launching of new, unique and enthralling soft-drink, ZEST. The beverages industry has been popular in Pakistan for the past many decades. Even though, the beverage industry has been monopolized by the 2 giants PEPSI and COKE that have completely captured the market, there still are some people, segments, and groups that have not been targeted optimally. The major focus of our team is to provide customer satisfaction to those groups and people that are still unsatisfied. There are many people clinched in the claws of diabetes, others are highly health conscious. Such are the people that are the prime target of ZEST. For the past few years the trend of eating out has gained remarkable popularity. This trend is solely not just the contribution of people considering eating out as a luxury but it has become a part of their life style. In fact it has become a necessity and about three-fourth of the middle class in Pakistan eat outs twice in every 7 days (The Daily Mail- online, 21st December 2009). This has led to substantial increase in the demand of beverages. KFC, McDonalds, Pizza hut etc have all contributed to this boom. According to a research conducted by Pepsi cola in 2005, 63% of its sales is attributed to fast foods (Pepsi Cola – Research Studies 2005). Apart from that, popular beverages like Pepsi and Coca Cola are available on corners of streets, off the side of interstates, airports, malls, schools, gas stations, local shopping center, and even in hospitals. This is the core reason for the massive market share of these brands and huge sales figures. Despite the complete domination of the market by these two colossal, the fast paced changing life styles and tastes of customer has opened gaps for these organizations to fill up. Mountain Dew, Pepsi Max, Pepsi Twist, Limca, Vimto and many more have emerged on the scene. The availability of new brands like Dew and others have clearly demonstrated that market gaps are constantly emerging. If this is so, why not a new organization, like us (ZEST), fills it up rather than the existing ones. Page 3 of 51
  • 4. Project Brief The concerned project is about providing superior taste keeping in mind the desires of health conscious customers. The company under the name of ZEST is to launch several different products with diversified tastes as per customer requirements. The aim is to provide equally good taste to our health conscious customers that were not available to them under the PEPSI and COKE brands. ZEST’s primary focus is to capture the market share in Karachi, with its targets extending to all major cities of Pakistan within 5 years time. Apart from making ZEST products easily available at all level of retail shops, we also intend franchises like KFC, Pizza Hut and McDonalds to endorse our product. Many regional and local fast food restaurants have developed around the main cities of Pakistan, in order to penetrate the market we will provide items that appeal to the unique regional tastes and habits at comparatively lower costs. Including the conventional Diet Pepsi-related taste, we are also offering other tastes like ZEST Orange (Miranda), ZEST White (7-up), ZEST Lem (Lemonade), ZEST Ice (Moutain Dew), ZEST Appachino (Apple flavoured), ZEST Minwa (Mineral Water) and also new tastes never offered before, ZEST Fruit-punch and Zest Voltage (Energy Drink). The conventional Pepsi and Coke drinks include Carbonated water, Phosphoric Acid, Caffeine, Emulsifier, Natural flavour, Artificial colour and also sugar and excessive calories. All ZEST products, on the other hand, are sugar free that reduces calories too the minimal like the Diet offerings of Pepsi and Coke. In addition, ZEST includes “SODIUM CYCLAMATE” (C6H12NNaO3S) an artificial sweetener, which provides the same good taste but does not increase calories substantially. Page 4 of 51
  • 5. Opportunity Rationale Pakistan is a potential market for beverages industry with a population of about 160 million with a greater chunk of it being the middle-class. Approximately two-fifth (Ages ranging 5 – 65 within Middle and Upper Middle Class taken from Economic Survey of Pakistan 2007-2008) of the total population represents the potential market for processed and packaged foods, which is still rising. Economic Survey of Pakistan 2007-2008 Page 5 of 51
  • 6. Furthermore it is estimated that the middle ranged age groups will contribute to the major portion of the Pakistan’s population in the coming years. It is estimated that the productive age group i.e. Ages 15 – 60 will take the greater chunk (about 67% of total population) by 2020 (Population Projections 1998-2023, Planning Commission; NIPS). Population Projections 1998-2023, Planning Commission; NIPS Page 6 of 51
  • 7. Electronic media has aided in the exposure to international food products and brands, which ultimately has increased their desirability amongst Pakistani consumers. The consumption of beverages in Pakistan is valued at approximately Rs. 90 to 120 billion yearly (Pepsi and Coke alone generate approximately Rs. 76 billion altogether as estimated by Pepsi in 2005 and Coke in 2006). The market has been growing at an annual rate of approximately 15% due to the substantial increase in eat- outs and it is estimated that by 2010 it would have grown by 30.5% (Pakistan Food & Drink Report Q4 2006). ZEST is to be a complete Production based organization focusing mainly on producing and distributing its products to the potential customers via retailers and other channels. Thus, proper promotional activities carry immense importance for ZEST’s establishment as a successful organization in the beverages industry. ZEST plans to commence its production in Korangi Industrial Area, Karachi on approximately 50,000 sq. feet of flat land near Vita Chowrangi. The space is partially to be used for installing the Manufacturing Plant, Quality Control Centre and R & D Department, and the rest for the Distribution Network Administration and a proper parking place for the Distribution Department’s Vehicles. To start its business, ZEST is launching its products amongst the population of 18 million in Karachi only. The estimated customers of the beverage industry are 10 to 12 million out of which the potential customers (health conscious customers to start with) of ZEST would be approximately 1 to 1.5 million. This would attribute to an approximate sale of Rs 2.7 to 4 billion yearly or Rs. 7 to 11 million daily. Page 7 of 51
  • 8. The two major competitors to ZEST would be Pepsi Cola and Coke. Diet-Pepsi, Diet 7-up, and Diet Coke are the only popular drinks offered by Pepsi and Coke to health conscious people. Apart from that, Diet Drinks are not easily available to customers especially at small retail shops, and if they are they are only available in tin cans or in family packs and NO REGULAR 250ml bottles. ZEST aims to satisfy its customer not just by providing the various new flavours, but also to make a perfect substitute of Diets easily available everywhere. The production capacity required to fulfill the demand of first year of ZEST’s launch is estimated at about 1.5 to 2 million gallons i.e. of Karachi alone. ZEST intends to market its products in the 250 ml Regular bottles package. The decided ratio for the packaging of ZEST drink is illustrated below: Page 8 of 51
  • 9. Pepsi’s only successful launch has been Mountain Dew in the past 5 years time. Pepsi Twist failed to earn Pepsi the same results. Coke hasn’t launched any new flavor in soft drinks either. Thus, in the conventional soft-drink market, new products have not been successfully launched creating a gap for ZEST to dominate. Page 9 of 51
  • 10. Economic Size The Pakistan beverage industry is approximately valued at Rs. 90 to 120 billion. The market has been growing at an annual rate of approximately 15% due to the substantial increase in eat-outs. The potential markets in Pakistan are: Karachi (population: 1 to 1.5 million); Lahore (population: 0.5 to 1 million); and Islamabad & Rawalpindi (approximately 1 to 1.5 million). The dramatic growth of the beverages industry in the country has been unparalleled. In recommendation of the plant capacity we considered the following stats: • Beverage industry has been growing rapidly entering into areas like Juices and Mineral Water too. • Soft-Drinks Sales has been increasing for over 15% for the past 5 years and they alone account for over 65% of beverages sales (Pepsi Statictics) • Beverages industry contributes to 25% of the total revenues of Eat- outs. • The need to have the proper production plant for producing beverages, which consists of production as well as bottling machines. • Discussions with the industry experts and entrepreneurs. Page 10 of 51
  • 11. Project Investment A business plan provides a platform to establish a good reputed business. But to do so, one has to invest and bear heavy costs. The costs to be incurred on the following assumptions: Human Equipment Capacity Location Resource 68 American and 1.5–2 in close Japanese million proximity to gallons main road (daily) Total Project Cost The initial investment plan proposed above is compiled based on many assumptions and calculations. Most of the information generated is from existing Beverages Industry Giants, Pepsi and Coke. Proposed costs and information is presented with Karachi as the only potential market in consideration, though later ZEST intends to expand its operations into the rest of Pakistan too. The cost structure has been divided into 4 different heads; 1) Machinery & Equipment 2) Human Resource 3) Office Furniture and Fixtures 4) Land and Building Page 11 of 51
  • 12. Equipment and Machinery Equipment Quantity Unit Cost Total Cost IB-04 Analysis 1 25,20,000 25,20,000 Assembly Brix Controller 1 1,85,000 1,85,000 CO2 Controller 1 1,20,000 1,20,000 Remote Display Unit 1 5,58,000 5,58,000 MULTILAB III 1 10,59,000 10,59,000 Remote Command Angel 100BPH 1 8,10,000 8,10,000 (Filling) Automatic Snapcap 1 15,85,000 15,85,000 Capping Machine RGY2T-1G-Linear- 1 12,63,000 12,63,000 Filling-Machine Reverse Osmosis 1 1,500,000 1,500,000 Water purification Plant Distribution Trucks 4 20,00,000 80,00,000 Refrigerators 2,000 12,000 2,40,00,0 00 TOTAL 2,012 1,16,12,000 4,16,00,000 All the machines are specialized machines for the manufacturing, filling or capping purpose. Their cost includes the cost of shipment and installations of theses machines in the Manufacturing Plant area. Distribution Trucks have been purchased to minimize the element of dependency on a third party or organization. Thus, ZEST’S Page 12 of 51
  • 13. Distribution Departmental Head directly control Distribution of the product. Page 13 of 51
  • 14. Office Furniture and Fixtures Equipment Quantity Unit Total Cost Cost Table & Chair for CEO 1 9,600 9,600 Table and chair for 6 8,000 48,000 Manager/Department Head Table and chair for 16 5,000 80,000 Supervisor/Officers Table and chair for 10 4,400 44,000 Other Staff Members Other Staff Chairs 15 400 6,000 Personal Computer 7 25,000 1,75,000 Laser Printer 7 15,000 1,05,000 Fax Machine 4 20,000 80,000 UPS 5 9,000 45,000 Air Conditioner 5 15,000 75,000 TOTAL 66 1,11,400 6,17,600 Personal computers along with a laser printer each, would be required for the CEO, Administration Manager, Marketing and Sales Manager, Distribution Manager, Production Manager, Human Resource Manager and Finance and Accounts Manager. UPS is to be arranged for each personal computer provided. Fax machines are to be provided to the CEO, Account and Finance Manager, Marketing and Sales Manager and Human Resource Manager. All the departments are interconnected via a local area network in order to make communication easier, faster and reliable. Page 14 of 51
  • 15. Human Resource Designation Staf Salary Annual (Monthly) f Cost CEO 1 60,000 7,20,000 Administration Manager 1 40,000 4,80,000 Marketing & Sales 1 40,000 4,80,000 Manager Distribution Manager 1 40,000 4,80,000 Production Manager 1 40,000 4,80,000 Human Resource Manager 1 40,000 4,80,000 Accounts and Finance 1 40,000 4,80,000 Manager Marketing Officer 5 15,000 9,00,000 Production Supervisor 2 30,000 7,20,000 Packing Supervisor 2 20,000 4,80,000 Sales Supervisor 5 30,000 18,00,000 Personal Driver 1 10,000 1,20,000 Distribution Truck Driver 4 10,000 4,80,000 Washer 2 9,000 2,16,000 Filler 5 10,000 6,00,000 Loader 6 12,000 8,64,000 Plant Helper 20 10,000 24,00,000 Page 15 of 51
  • 16. Packing Supervisor 2 10,000 2,40,000 Watchman 2 6,000 1,44,000 Sweeper 5 6,000 1,44,000 TOTAL 68 4,78,000 1,27,08,000 The salaries are according to the latest statistics and rates Page 16 of 51
  • 17. that are going on in the market. A Departmental Head is assigned for each of the five independent departments that will be functioning in ZEST Organization. Departmental Heads have supervisors or officers to assist them in the daily routine tasks and to provide them with the details required. Apart from that, there are many general and specialized labour to perform the different required jobs in order to keep the plant in a running condition. These include washer, filler loader and the plant helpers. This is the current workforce requirement for the commencement of business in Karachi alone. In the near future, ZEST’S aim to expand its business through out Pakistan, will definitely create huge gaps that would be filled with more skillful and competitive labour. Page 17 of 51
  • 18. Land and Building For the proposed set of Beverages Manufacturing Plant, a total of 100,000 sq. feet is required. This land requirement includes space for the installation of plant and machinery, Distribution Network and Distribution Trucks, management office, store for bottles, finished product and parking. The requirement of each of these departments is bifurcated below: Total Covered Area Requirement Space Requirement Area Requirement Bottle Washing and Storage 10,000 sq. feet Plant (50,000 bottles) Actual Manufacturing Plant 40,000 sq. feet including Quality Control Finished product storage room 1,500 sq. feet Management office 3,000 sq. feet Distribution Network 10,000 sq. feet (Including Distribution Trucks Parking Area) Water Filtration Plant 15,000 sq. feet Factory Canteen 1,500 sq. feet Factory Masjid 2,000 sq. feet Car Parking Lot 2,000 sq. feet TOTAL Area (Minimal) 85,000 sq. feet The area calculated is solely of the covered area, that is why the selected site is much more than the Total required area proposed by this analysis. Page 18 of 51
  • 19. Total Land Cost & Construction Cost Page 19 of 51
  • 20. Total Land Cost 100,000 sq. feet 6,00,00,000 Covered Area Requirement 85,000 sq. feet Time required for civil works 11 months Construction Rates Bottle Washing and Storage Plant 10,000 60,00,000 sq. feet @ Rs. 600 per feet Actual Manufacturing Plant including 2,40,00,000 Quality Control 40,000 sq. feet @ Rs. 600 per feet Finished Product Storage Room 1,500 sq. 9,00,000 feet @ Rs. 600 per feet Management Office 3,000 sq. feet @ Rs. 18,00,000 600 per feet Distribution Network (Including 60,00,000 Distribution Trucks Parking Area) 10,000 sq. feet @ Rs. 600 per feet Water Filtration Plant 15,000 sq. feet @ 90,00,000 Rs. 600 per feet Factory Canteen 1500, sq. feet @ Rs. 500 7,50,000 per feet Factory Masjid 2,000 sq. feet @ Rs. 500 10,00,000 per feet Car Parking Lot 2,000 sq. feet @ Rs. 30 60,000 per feet TOTAL Area (Minimal) 4,95,10,000 The area calculated is solely of the covered area, which is why the selected site is much more than the Total required area proposed by this analysis. Page 20 of 51
  • 21. Utilities Requirement Utility Monthly Charges Electricity 7,50,000 Water 20,000 Gas 4,00,000 Telephone 25,000 TOTAL COST 11,95,000 The expenditures quoted above have been estimated after considering the actual expense of similar organizations that have been in operation for a considerable duration of time. Working Capital Requirement Expenditures 2 Months Cost Utilities 23,90,000 Salaries 9,86,000 Raw Materials (1 week 3,50,000 inventory only) Other Expenditures (Fuel, 74,000 etc.) TOTAL COST 38,00,000 To ensure the smooth running of a business for the first few months, the above-mentioned cost should be well kept in mind. Page 21 of 51
  • 22. The other expenditure head includes the diesel consumption and the maintenance of the Distribution Trucks and other preliminary expenditures that should not be overlooked. Page 22 of 51
  • 23. Marketing and Advertising Strategy Marketing is a very important part of successful business operations. Thus, it is essential to properly implement carefully formulated strategies. Product ZEST will not only be according to the needs of the people but also according to the quality and standards that are to be maintained by us in our publicity campaigns. The services attached with the product would be regular and sufficient supply. In addition, we will see that the product reaches the customers in good order and condition. Overall, the product’s main core benefits are that it is a premium indulgent product and customers’ value propositions are constantly changing, as depicted through launching of various brands. Page 23 of 51
  • 24. Pricing ZEST will keep its prices at par with existing brands of the market. We will exert in lowering the cost of the raw materiel by obtaining it from the source markets as far as possible, so our prices will be more affordable compared to others without any compromise on quality and standard. More over, we will try our best to reduce our fixed cost and all these factors will have a favorable balance on the price structure. ZEST does not intend to enter the market with a penetrating strategy, it rather will enter as a brand that is of a good quality and fine standard. The following prices are proposed for the Zest Products: Zest, Zest White, Zest Orange, Zest Appachino Zest Lem, Zest Ice and Zest Fruitpunch: Junior 175 ml Rs. 10 Regular 250 ml Rs. 15 Can 330 ml Rs. 25 Youth500 ml Rs. 20 Family 1.5 ltr Rs. 50 Jumbo 2.5 ltr Rs. 70 Promotion For a product like carbonated soft drink, the importance of promotion in the marketing strategy is immense. Promotion will assume the most important position in the marketing mix of ZEST. ZEST’s promotion will be in the hands of Marketing Department, which will work in coordination with Sales Department, Accounts and Finance Department and Production department. Page 24 of 51
  • 25. Promotion will include activities directed towards increase in sales in different areas such as sales promotion letters to restaurants and marriage halls including existing multinational caterers like KFC and McDonald and also new entrants like Pizzeria. More and more food streets are opening in Karachi; such as that at Powerhouse chowrangi, North Karachi. This provides an opportunity for ZEST to cater for the needs of growing soft drink market. ZEST labeled refrigerators will serve for merchandizing part of promotion. ZEST posters will also be placed at points of sale. Placement Since our products will be new to the market and the tag they would carry that of “ZEST” is not known, its important to build up awareness of our products. The Distribution Network will directly distribute the product to the retail shops by means of our delivery trucks. This, apart from ensuring proper placement, will also provide chances of shopkeepers and customer of interacting with our Sales Supervisors regarding the product details. Our Sales Supervisors will visit the 18 towns of Karachi on regular basis on the directions of our Sales Manager who will ensure smooth and consistent supply of Zest. Thus, ZEST’s marketing team intends to blend with the distribution team to carry out this difficult task of creating awareness and recognition of ZEST as a well-reputed drink in the market. The map on the following page provides an idea of the distribution of the 18 towns of Karachi. Page 25 of 51
  • 26. Page 26 of 51
  • 27. Advertising ZEST will approach both print and electronic media for advertising its products. However, since ZEST’s current market is Karachi, more emphasis will be placed on Karachi-bound advertising such as: • Radio channels Fm 100, Fm 101, Fm103, Fm 89 and Fm 96 • Signboards • Daily Newspapers • Television • & the Internet The advertising will follow once our sales team has reached all retailers and proposed supply is accounted for throughout Karachi. The marketing personnel employed by ZEST will prepare the ZEST’s advertising plan. The advertising budget will be based as a percentage of sales. Page 27 of 51
  • 28. Projected Cash flows Projected cash flows of ZEST for the first five years are as follows: Total Revenue Generations Years Projected Cash flows 1 Rs. 1,642,000,000 2 Rs. 2,053,000,000 3 Rs. 5,475,000,000 4 Rs. 9,125,000,000 5 Rs. 14,600,000,000 Assumptions The estimated customers of the beverage industry in Karachi are 10 to 12 million out of which the potential customers (health conscious customers to start with) of ZEST would be approximately 1 to 1.5 million. This would attribute to an approximate sale of Rs 1 to billion yearly on the assumption that every second individual consumes a ZEST product worth Rs. 15 daily. Due to the increase in the middle-age group in the upcoming years, beverages market is bound to increase. Thus, ZEST’s sales are expected to rise each year. Year 1 Targeted Customer 1.5 m, 1 out of every 5 consumes ZEST Year 2 Targeted Customer 1.5 m, 1 out of every 4 consumes ZEST Year 3 Targeted Customer 3.0 m, 1 out of every 3 consumes ZEST Year 4 Targeted Customer 5.0 m, 1 out of every 3 consumes ZEST Year 5 Targeted Customer 8.0 m, 1 out of every 3 consumes ZEST Page 28 of 51
  • 29. Working Capital Management Requirements Cash 11,400,000 Inventory: Zest Cola 75,0000 Zest White 50,000 Zest Orange 50,000 Zest Appachino 50,000 Zest Lem 35,000 Zest Ice 50,000 Zest Fruitpunch 35,000 Zest Minwa 25,000 Zest Voltage 10,000 The cash amount posted above has been derived keeping in mind the expenses that ZEST might have to pay as well as the normal daily routine expenditures. Page 29 of 51
  • 30. Equity-Debt Financing The project requires about 175 million to be commenced. The funds generation is illustrated in the table below: Source Amount EQUITY Arsalan Aftab Rs. 25,000,000 Faisal Arshad Rs. 25,000,000 Umair Farooqi Rs. 30,000,000 Zeeshan Qayyum Rs. 15,000,000 Naresh Kumar Rs. 10,000,000 DEBT 26% Debentures Rs. 20,000,000 22% Debentures Rs. 50,000,000 Both the Debentures are to be redeemed after 10 years under normal circumstances. Page 30 of 51
  • 31. Projected Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 Fixed Assets 176,000,000 176,000,000 176,000,000 176,000,000 176,000,000 (Cost) Working 275,584,510 376,552,318 294,130,880 376,842,820 361,722,220 Capital Revenue 1,642,000,000 2,053,000,000 5,475,000,000 9,125,000,000 14,600,000,000 COGS (1,082,548,815) (1,365,265,518) (3,625,459,621) (5,750,017,380) (9,195,288,234) Depreciation (133,520) (133,520) (133,520) (133,520) (133,520) Selling & Admin (120,000,000) (128,000,000) (208,000,000) (288,000,000) (416,000,000) Expenses Interest (16,200,000) (16,200,000) (16,200,000) (16,200,000) (16,200,000) Expense Profit before 423,117,665 543,400,962 1,625,206,859 3,070,649,100 4,972,378,246 Tax Tax (21%) (88,854,710) (114,114,202) (341,293,440) (644,836,311) (1,044,199,432) Net Income 334,262,955 429,286,760 1,283,913,419 2,425,812,789 3,928,178,814 Terminal In Flow Recovery from Working 361,722,220 Capital Recovery from Sale 29,617,169 (Fixed Assets) Cash Flows 334,262,955 429,286,760 1,283,913,419 2,425,812,789 3,928,178,814 Depreciation 8,423,520 7,719,520 7,156,320 6,705,760 6,345,310 Expense Cash Flows 342,686,475 437,006,280 1,291,069,739 2,432,518,549 4,325,863,513 Page 31 of 51
  • 32. Total Terminal In flow 4,315,863,513 Page 32 of 51
  • 33. Additional Information and Assumptions Fixed Assets have been recorded under historical cost methods, thus, shown in Balance sheet at cost. Working Capital has been posted after the following calculations: Yr1 Yr2 Yr3 Yr4 Yr5 Inventory (End) 175,584,510 226,552,318 69,130,880 126,842,820 86,722,220 Cash Requirements 100,000,000 150,000,000 225,000,000 250,000,000 275,000,000 The Sales revenue and Cost of Goods Sold had already been calculated earlier and is posted as it is. Depreciation mentioned is related to the Administration and Selling (example furniture and office equipment) and has been taken from the “Depreciation Schedule (Office Equipment)”. Selling and Administration Expenses are calculated as follows: Yr1 Yr2 Yr3 Yr4 Yr5 Adv. On Cable TV 80,000,000 80,000,000 160,000,000 240,000,000 320,000,000 Adv. On FM 32,000,000 32,000,000 32,000,000 32,000,000 64,000,000 Adv. on Newspaper 8,000,000 16,000,000 16,000,000 16,000,000 32,000,000 In the first 2 years, advertisement was only posted on 2 channels, in the rd 3 Year in 3 channels, and 4 channels in the fourth year all showing ZEST advertisements thrice a week. The increase in the cost of advertising through FM is also because of the increase in the frequency of advertisements being done. Advertisements on newspaper is also being done, the major increase in the last year is due to the posting of advertisements in Sunday Dawn too. Page 33 of 51
  • 34. The interest expense was calculated as per the rate mentioned on Debentures: 22% Debentures 50,000,000 = 50,000,000 x 0.22 = 11,000,000 26% Debentures 20,000,000 = 20,000,000 x 0.26 = 5,200,000 Total Interest 16,200,000 Recovery from sale of Fixed Assets is an amount driven from the book value summation of the Fixed Assets. The depreciation amount being added back is the summation of depreciation calculated earlier and the depreciation of office equipments. The repayment of loan is being done at the end of 5 th year because of the liquidation of the business, otherwise the Debentures payable were after 10 years. Page 34 of 51
  • 35. Weighted Average Cost of Capital WACC = Cost of Equity (E/A) + Cost of Debt (D/A) (1-Tax) Cost of Debt: Debentures Rs. 20,000,000 (26%) Debentures Rs. 50,000,000 (22%) As the Debentures bear different interest rates as well as different amounts, the Cost of Debt must be calculated as under: 20,000,000/70,000,000 x 26 = 7.4285 50,000,000/70,000,000 x 22 = 15.7142 Total Cost of Debt (Average) = 23.142 % Cost of Equity: Cost of Equity is considered to be the “Cost of Debt” + “Risk Premium”, where the “Risk Premium” is considered 7%. Cost of Equity will be =23.142% + 7% Total Cost of Equity = 30.142% or 30% Page 35 of 51
  • 36. Weighted Average Cost of Capital WACC = [(105,000,000/175,000,000)](30%) +[(70,000,000/175,000,000)](22%)(79%) = 0.18 + 0.06952 = 0.24952 WACC = 24.952% Net Present Value NPV = PV inflow – PV outflow Year Cash Inflows PV Cash Inflows 1 330,196,305 265,022,076.06 2 409,125,652 263,558,116.80 3 1,277,817,698 660,691,054.75 4 2,411,952,215 1,000,940,057.50 5 4,310,297,180 1,435,675,957.44 Total 8,739,389,050 3,625,887,263 NPV = 3,625,887,263 – 175,000,000 NPV = Rs 3,450,887,262.55 Page 36 of 51
  • 37. IRR: IRR is the rate where Net Present Value becomes “0”. Thus, it’s the rate where the:- PV inflow = PV outflow 175,000,000 = 330,196,305 + 409,125,652 + 1,277,817,698 + 2,411,952,215 + 4,310,297,180 (1+i) (1+i)2 (1+i)3 (1+i)4 (1+i)5 The rate “I” calculated is: IRR= 257% Pay Back Period 0 1 2 3 4 5 (175,000,000) 330,196,305 409,125,652 1,277,817,698 2,411,952,215 4,310,297,180 (155,196,305) Pay Back Period = Years Before fill recovery + Unrecovered amount of Beg of the year Cash flow of the year = 0 + 175,000,000 330,196,305 = 0 + 0.52998776 Pay Back Period = 0.53 years Page 37 of 51
  • 38. Discounted Pay Back Period 0 1 2 3 4 5 (175,000,000) 265022076.1 263558116.8 660691054.8 1000940058 1435675957 (90,022,076.1) Discounted Pay Back Period = Years before fill recovery + Unrecovered amount of Beg of the year Cash flow of the year =0 + 175,000,000 265,022,076.1 Discounted Pay Back Period = 0.6603 years Page 38 of 51
  • 39. Sensitivity Analysis of Project Along with new opportunities, organizations are constantly facing new challenges in the market. The success of an organization is in its capability of handling such challenges and changing accordingly. It is important to check whether a project is stable enough to bear economic, political as well as social changes and the influences that these changes bring about. To do so, Sensitivity Analysis is carried out in which one variable is disturbed to examine the impact of the change on the overall project. There are many variables that can be changed to check the sensitivity and stability of the project. We are considering only two variables for our Project “ZEST”. Variables Disturbed: 1) Sales Volume (being decreased by 20%), and 2) Cost of Labour (being increased by 25%). Page 39 of 51
  • 40. Sales Volume (decreased by 20%) The sales in units is decreased by 20% to check the stability and margin of safety of the project. Accordingly, factors directly related to Sales like COGS also change. Thus, COGS is reduced due to the reduction in the variable costs, but fixed costs remain same. This impact enables an Analyst to foresee the problems that may arises if certain disturbances occur in the project, allowing precautionary solutions to be drafted out. Page 40 of 51
  • 41. Cost of Labour (increased by 25%) The labour cost is increased by 25% to see what impact the increased cost would bring about in revenue generations. The increase in Labour Cost only increases the Manufacturing Cost and the COGS. This impact enables an Analyst to foresee the problems that may arises if certain disturbances occur in the project, allowing precautionary solutions to be drafted out. Page 41 of 51
  • 42. Page 42 of 51
  • 43. Projected Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 Fixed Assets (Cost) 176,000,000 176,000,000 176,000,000 176,000,000 176,000,000 Working Capital 275,584,510 376,552,318 294,130,880 376,842,820 361,722,220 Revenue 1,313,600,000 1,642,400,000 4,380,000,000 7,300,000,000 11,680,000,000 COGS (834,337,736) (1,095,721,298) (2,945,337,555) (4,593,308,227) (7,380,122,751) Depreciation (133,520) (133,520) (133,520) (133,520) (133,520) Selling & Admin Expenses (120,000,000) (128,000,000) (208,000,000) (288,000,000) (416,000,000) Interest Expense (16,200,000) (16,200,000) (16,200,000) (16,200,000) (16,200,000) Profit before Tax 342,928,744 402,345,182 1,210,328,925 2,402,358,253 3,867,543,729 Tax (21%) (89,521,880) (110,690,238) (341,758,088) (643,356,653) (1,042,719,773) Net Income 336,772,785 416,406,132 1,285,661,378 2,420,246,455 3,922,612,481 Terminal In Flow Recovery from Working 361,722,220 Capital Recovery from Sale 29,617,169 (Fixed Assets) Net Income 336,772,785 416,406,132 1,285,661,378 2,420,246,455 3,922,612,481 Depreciation 8,423,520 7,719,520 7,156,320 6,705,760 6,345,310 Expense Cash Flows 345,196,305 424,125,652 1,292,817,698 2,426,952,215 4,320,297,180 Repayment of (15,000,000) (15,000,000) (15,000,000) (15,000,000) (10,000,000) Loans Total Terminal In flow 4,310,297,180 Page 43 of 51
  • 44. Page 44 of 51
  • 45. Projected Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 Fixed Assets 176,000,000 176,000,000 176,000,000 176,000,000 176,000,000 (Cost) Working 275,584,510 376,552,318 294,130,880 376,842,820 361,722,220 Capital Revenue 1,642,000,000 2,053,000,000 5,475,000,000 9,125,000,000 14,600,000,000 COGS (1,082,901,815) (1,365,618,518) (3,625,812,621) (5,750,370,380) (9,195,641,234) Depreciation (133,520) (133,520) (133,520) (133,520) (133,520) Selling & Admin (120,000,000) (128,000,000) (208,000,000) (288,000,000) (416,000,000) Expenses Interest (16,200,000) (16,200,000) (16,200,000) (16,200,000) (16,200,000) Expense Profit before 422,764,665 543,047,962 1,624,853,859 3,070,296,100 4,972,025,246 Tax Tax (21%) (88,780,580) (114,114,202) (341,293,440) (644,836,311) (1,044,199,432) Net Income 333,984,085 428,933,760 1,283,560,419 2,425,459,789 3,927,825,814 Terminal In Flow Recovery from Working 361,722,220 Capital Recovery from Sale 29,617,169 (Fixed Assets) Net Income 333,984,085 428,933,760 1,283,560,419 2,425,459,789 3,927,825,814 Depreciation 8,423,520 7,719,520 7,156,320 6,705,760 6,345,310 Expense Cash Flows 342,407,605 436,653,280 1,290,716,739 2,432,165,549 4,325,510,513 Repayment of (15,000,000) (15,000,000) (15,000,000) (15,000,000) (10,000,000) Page 45 of 51
  • 46. Loans Total Terminal In flow 4,315,510,513 Page 46 of 51
  • 47. Scenario Analysis of Project The Scenario is based on an optimistic as well as a pessimistic approach. It provides an environment within which the stability and flexibility of the project can be measured and evaluated. The first Scenario is based on Inflation (of about 10%) which causes the general rise in prices of all things. The Second one is based on increased competition. Page 47 of 51
  • 48. Projected Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 Fixed Assets 176,000,000 176,000,000 176,000,000 176,000,000 176,000,000 (Cost) Working 275,584,510 376,552,318 294,130,880 376,842,820 361,722,220 Capital Revenue 1,806,200,000 2,258,300,000 6,022,500,000 10,037,500,000 16,060,000,000 COGS (1,190,803,697) (1,501,792,070) (3,988,005,583) (6,325,019,118) (10,114,817,057) Depreciation (133,520) (133,520) (133,520) (133,520) (133,520) Selling & Admin (132,000,000) (140,800,000) (228,800,000) (316,800,000) (457,600,000) Expenses Interest (16,200,000) (16,200,000) (16,200,000) (16,200,000) (16,200,000) Expense Profit before 467,062,784 599,374,410 1,789,360,897 3,379,347,362 5,471,249,423 Tax Tax (21%) (98,083,185) (114,114,202) (341,293,440) (644,836,311) (1,044,199,432) Net Income 368,979,599 485,260,208 1,448,067,457 2,734,511,051 4,427,049,991 Terminal In Flow Recovery from Working 361,722,220 Capital Recovery from Sale 29,617,169 (Fixed Assets) Cash Flows 368,979,599 485,260,208 1,448,067,457 2,734,511,051 4,427,049,991 Depreciation 8,423,520 7,719,520 7,156,320 6,705,760 6,345,310 Expense Cash Flows 377,403,119 492,979,728 1,455,223,777 2,741,216,811 4,824,734,690 Page 48 of 51
  • 49. Total Terminal In flow 4,814,734,690 Page 49 of 51
  • 50. Projected Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 Fixed Assets 176,000,000 176,000,000 176,000,000 176,000,000 176,000,000 (Cost) Working 275,584,510 376,552,318 294,130,880 376,842,820 361,722,220 Capital Revenue 1,436,750,000 1,796,375,000 4,790,625,000 7,984,375,000 12,775,000,000 COGS (866,039,052) (1,092,212,414) (2,900,367,697) (4,600,013,904) (7,356,230,587) Depreciation (133,520) (133,520) (133,520) (133,520) (133,520) Selling & Admin (150,000,000) (160,000,000) (260,000,000) (360,000,000) (520,000,000) Expenses Interest (16,200,000) (16,200,000) (16,200,000) (16,200,000) (16,200,000) Expense Profit before 404,377,428 527,829,066 1,613,923,783 3,008,027,576 4,882,435,893 Tax Tax (21%) (84,919,260) (114,114,202) (341,293,440) (644,836,311) (1,044,199,432) Net Income 319,458,168 413,714,864 1,272,630,343 2,363,191,265 3,838,236,461 176,000,000 176,000,000 176,000,000 176,000,000 176,000,000 Terminal In Flow Recovery from Working 361,722,220 Capital Recovery from Sale 29,617,169 (Fixed Assets) Cash Flows 319,458,168 413,714,864 1,272,630,343 2,363,191,265 3,838,236,461 Depreciation 8,423,520 7,719,520 7,156,320 6,705,760 6,345,310 Expense Cash Flows 327,881,688 421,434,384 1,279,786,663 2,369,897,025 4,235,921,160 Page 50 of 51
  • 51. Total Terminal In flow 4,225,921,160 Page 51 of 51