Professional Documents
Culture Documents
ZAHID, SOHAIB
FAUJI CEMENT
1/23/2012
SUBMITTED TO
CH. MAZHAR HUSSAIN
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
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.
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.
TABLE OF CONTENTS
Chapter No. 1
Executive Summary....13
Introduction.14
Objective.14
Company Profile.15
Company History....15
Business......16
Vision......16
Mission........17
Strategies.....17
Values......18
Statement of Corporate Governance...19
Chapter No. 2
Capital Budgeting20
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 Capital27
Cost of Equity........27
CAPM....28
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
Pay Back Period.44
Profitability Index......45
Calculation of 16100M Project..46
Application of Capital Budgeting Technique........51
Interpolation...55
Pay Back Period.56
Profitability Index..57
Selection of Project........59
Chapter No 4
Conclusion.....60
References..61
10
List of Tables
11
List of Graph
12
predicting future cash flows and also use selection procedure method of capital
budgeting.
After studying the capital budgeting process for cement industry and case study of
capital budgeting, we have concluded that almost all the objective and purpose of
the report have been performed and a much practical project has been presented.
We have understood the capital budgeting process and its application in the
perspective of cement industry & Fauji Cement. We have calculated the NPV,
IRR, PI & PBP of this project, due to some drawbacks in profitability index and
payback period we selected the project on the basis of Net present value &
internal rate of return techniques.
We suggest Fauji Cement Company is to definitely accept the project which cost
is 22000M.It is cost effective and reliable plant.
13
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.
OBJECTIVE
The 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.
14
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 23rd
November 1992, and it is sponsored by Fauji Foundation Company has achieved
the certificate of commencement of business on 22nd 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
15
manufacturing. The contract has established on 1st 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.
16
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.
17
VALUES
Customers we listen to our customers and improve our product to meet
their present and future needs.
18
19
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.
20
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.
21
Estimate the cash flow generated from the project and value of asset at the
end of its useful life.
The cost of capital should be known at which the cash flow is discounted.
It is based on project risk.
At the last compare the present value of cash flow. If present cash flow is
greater than cost, the project is accepted.
22
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:
23
PROFITABILITY INDEX
It is also known as value investment ratio & profit investment ratio. It is the ratio
to 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.
24
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.
25
26
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 investor
because 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
27
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
28
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%)).
29
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 GERMANY
B) 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
30
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.
31
CALCULATION OF WAAC
For calculation of weighted average cost of capital we first have to determine
the
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
32
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%
33
FAUJI CEMENT
CALCULATION OF
22OOOM
PROJECT
34
Years
Sales
Sales Million
LESS C.G.S
Gross Profit
LESS A & S
Expenses
Operating Income
LESS Depreciation
EBIT
LESS Interest
EBT
LESS TAX
Net Flow
Add Depreciation
NET CASH FLOW
35
Years
Sales
Sales Million
LESS C.G.S
Gross Profit
LESS A & S
Expenses
Operating Income
LESS Depreciation
EBIT
LESS Interest
EBT
LESS TAX
Net Flow
Add Depreciation
NET CASH FLOW
2020
2021
2022
2023
2024
2025
2026
2027
1.64E+10 1.8E+10 2.1E+10 2.2E+10 2.4E+10 2.66E+10 2.9E+10 3.164E+10
16392.9
18360
20563
22414
24431
26630 29026.7 31639.12
11507.82 12888.8 14435.4 15734.6 17150.7 18694.27 20376.8 22210.663
4885.085 5471.3 6127.85 6679.36 7280.5 7935.745 8649.96 9428.4583
649.159
4235.926
880
3355.926
1633.5
1722.426
602.8492
1119.577
880
1999.58
727.058
4744.24
880
3864.24
1633.5
2230.74
780.758
1449.98
880
2330
814.305
5313.55
880
4433.55
1633.5
2800.05
980.016
1820.03
880
2700
887.592
5791.77
880
4911.77
1633.5
3278.27
1147.39
2130.87
880
3010.9
967.476
6313.02
880
5433.02
1633.5
3799.52
1329.83
2469.69
880
3349.7
1054.549
6881.196
880
6001.196
1633.5
4367.696
1528.694
2839.002
880
3719
1149.46
7500.5
880
6620.5
1633.5
4987
1745.45
3241.55
880
4121.55
1252.9092
8175.5491
880
7295.5491
1633.5
5662.0491
1981.7172
3680.3319
880
4560.332
36
Years
Sales
Sales Million
LESS C.G.S
Gross Profit
LESS A & S
Expenses
Operating Income
LESS Depreciation
EBIT
LESS Interest
EBT
LESS TAX
Net Flow
Add Depreciation
NET CASH FLOW
2028
2029
2030
2031
2032
2033
2034
2035
2036
3.35E+10 3.6E+10 3.8E+10 4E+10 4E+10 4E+10 4.8E+10 5E+10 5E+10
33537.5
35550
37683
39944 42340 44881
47574 50428 53454
23543.3 24955.9 26453.3 28040.5 29723 31506 33396.6 35400 37524
9994.166 10593.8 11229.4 11903.2 12617 13374 14176.9 15028 15929
1328.084
8666.082
880
7786.082
1633.5
6152.582
2153.404
3999.178
880
4879.18
1407.77
9186.05
880
8306.05
1633.5
6672.55
2335.39
4337.16
880
5217.2
1492.23
9737.21
880
8857.21
1633.5
7223.71
2528.3
4695.41
880
5575.4
1581.77
10321.4
880
9441.44
1633.5
7807.94
2732.78
5075.16
880
5955.2
1676.7
10941
880
10061
1633.5
8427.2
2949.5
5477.7
880
6358
37
Cash Flows
4000
Years
3000
2000
1000
0
1
11 13 15 17 19 21 23 25
38
NPV Millions
343.158745
455.279312
567.397218
685.212643
803.250023
934.888862
1067.54106
1208.9185
1360.25652
1522.86231
1687.51866
1802.91754
1914.10889
2043.40794
2169.23812
2291.62407
2357.09097
2404.21913
2466.99617
2523.37395
2573.96711
2639.83938
2690.21447
2745.9445
2806.92723
44066.1533
22000
22066.153
39
Graph of NPV
NPV
60000
50000
40000
30000
NPV
20000
10000
0
1%
2%
3%
4%
5%
6%
7%
8%
40
Years
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
Net Cash
Flow
358.2577297
491.7016572
641.1588561
808.5509188
996.0300291
1206.006633
1441.180429
1704.57508
1999.57709
2329.97934
2700.029861
3010.872299
3349.690555
3719.002455
4121.552426
4560.331895
4879.178309
5217.155507
5575.411337
5955.162518
6357.698769
6784.387195
7236.676927
7716.104042
8224.296785
Discount Rate @
5%
1.05
1.1
1.15
1.21
1.27
1.34
1.4
1.47
1.55
1.62
1.71
1.79
1.88
1.97
2.07
2.18
2.29
2.4
2.52
2.65
2.78
2.92
3.07
3.22
3.38
SUM OF PV
CASH OUT FLOW
NPV
NPV
Millions
341.197838
447.001507
557.52944
668.2239
784.275613
900.00495
1029.41459
1159.57488
1290.04974
1438.25885
1578.96483
1682.05156
1781.7503
1887.81851
1991.08813
2091.89536
2130.64555
2173.81479
2212.46482
2247.23114
2286.942
2323.42027
2357.22375
2396.3056
2433.2239
40190.3718
22000
18190.3718
41
NPV Millions
325.688845
406.365006
482.074328
553.801999
618.652192
681.359679
742.87651
796.530411
850.883868
899.605923
947.378899
961.940031
970.924799
981.267139
988.381877
993.536361
966.173922
940.028019
912.505947
886.184898
859.148482
833.4628
808.567254
784.156915
759.399518
19950.8956
22000
-2049.1044
42
INTERPOLATION
Interpolated Discount Rate = iL + (iH iL)(PV1 )
PVl -PVH
Interpolated Discount Rate = 0.05 + (0.10 0.05) (18190.37)
18190.37 (-2049.10)
Interpolated Discount Rate= 0.05 + 909.51
20239.47
Interpolated Discount Rate= 0.094 OR 9.4%
IRR GRAPH
IRR
50000
40000
30000
20000
IRR
10000
0
2%
4%
6%
8%
10%
12%
14%
16%
-10000
-20000
43
Initial CF
22000M
NPV
Accumulative CF
343.1587
455.2793
567.3972
685.2126
803.25
934.8889
1067.541
1208.918
1360.257
1522.862
2547.198
1802.918
1914.109
2043.408
2169.238
2291.624
2357.091
2404.219
2466.996
2523.374
2573.967
2639.839
2690.214
2745.944
2806.927
798.4380572
1365.835275
2051.047918
2854.297942
3789.186804
4856.727862
6065.646359
7425.902882
8948.765196
11495.96318
13298.88072
15212.98961
17256.39755
19425.63567
21717.25974
24074.35071
26478.56984
28945.56601
31468.93995
34042.90707
36682.74644
39372.96091
42118.90541
44925.83264
44
PROFITABILITY INDEX
45
FAUJI CEMENT
CALCULATION OF
16100M PROJECT
46
Years
Sales
Sales Million
C.G.S
Gross Profit
Admin Selling Expenses
Operating Income
Depreciation
EBIT
Interest
2012
5793216471
5793.216471
4066.837963
1726.378508
229.4113723
1496.967136
644
852.9671361
1195.425
EBT
TAX
-342.4578639
-119.8602524
Net Flow
Add Depreciation
NET CASH FLOW
-222.5976115
644
421.4023885
2013
6372538118
6372.538118
4473.521759
1899.016359
252.3525095
1646.66385
644
1002.66385
1195.425
192.7611503
-67.4664026
125.2947477
644
518.7052523
2014
7009791930
7009.79193
4920.873935
2088.917995
277.5877604
1811.330235
644
1167.330235
1195.425
2015
7710771123
7710.771123
5412.961328
2297.809795
305.3465365
1992.463258
644
1348.463258
1195.425
2016
8481848235
8481.848235
5954.257461
2527.590774
335.8811901
2191.709584
644
1547.709584
1195.425
-28.09476531
-9.833167859
153.0382582
53.56339036
352.284584
123.2996044
571.45
200.00
-18.26159745
644
625.7384025
99.4748678
644
743.4748678
228.9849796
644
872.9849796
371.44
93300
9330.0
6549.6
2780.3
369.46
2410.8
1766.8
119
1015.4
47
Years
Sales
Sales Million
C.G.S
Gross Profit
Admin Selling Expenses
Operating Income
Depreciation
EBIT
Interest
EBT
TAX
Net Flow
Add Depreciation
NET CASH FLOW
2020
2021
2022
1.2418E+10 1.366E+10 1.5E+10
12418.274 13660.101 15026.11
8717.62835 9589.3912 10548.33
3700.64565 4070.7102 4477.781
491.76365 540.94002 595.034
3208.882 3529.7702 3882.747
644
644
644
2564.882 2885.7702 3238.747
1195.425
1195.425 1195.425
1369.457 1690.3452 2043.322
479.309951 591.62082 715.1628
890.147051 1098.7244 1328.159
644
644
644
1534.14705 1742.7244 1972.159
2023
1.623E+10
16228.2
11392.197
4836.0037
642.63674
4193.367
644
3549.367
1195.425
2353.942
823.8797
1530.0623
644
2174.0623
2024
2025
1.75E+10 1.89E+10
17526.46 18928.57
12303.57 13287.86
5222.884 5640.715
694.0477 749.5715
4528.836 4891.143
644
644
3884.836 4247.143
1195.425 1195.425
2689.411 3051.718
941.294 1068.101
1748.117 1983.617
644
644
2392.117 2627.617
2026
2.04E+10
20442.86
14350.89
6091.972
809.5372
5282.435
644
4638.435
1195.425
3443.01
1205.053
2237.956
644
2881.956
48
Years
Sales
Sales Million
C.G.S
Gross Profit
Admin Selling Expenses
Operating Income
Depreciation
EBIT
Interest
EBT
TAX
Net Flow
Add Depreciation
NET CASH FLOW
2028
2.34E+10
23402.98
16428.9
6974.089
926.7582
6047.331
644
5403.331
1195.425
4207.906
1472.767
2735.139
644
3379.139
2029
2.48E+10
24807.16
17414.63
7392.535
982.3637
6410.171
644
5766.171
1195.425
4570.746
1599.761
2970.985
644
3614.985
2030
2031
2032
2033
2.63E+10 2.787E+10 2.955E+10 3.132E+10
26295.59 27873.329 29545.729 31318.473
18459.51 19567.077 20741.102 21985.568
7836.087 8306.2522 8804.6273 9332.9049
1041.306 1103.7838 1170.0109 1240.2115
6794.781 7202.4683 7634.6164 8092.6934
644
644
644
644
6150.781 6558.4683 6990.6164 7448.6934
1195.425
1195.425
1195.425
1195.425
4955.356 5363.0433 5795.1914 6253.2684
1734.375 1877.0652
2028.317 2188.6439
3220.982 3485.9782 3766.8744 4064.6245
644
644
644
644
3864.982 4129.9782 4410.8744 4708.6245
20
3.32E+
33197.5
23304.7
9892.87
1314.62
8578.2
6
7934.2
1195.4
6738.
2358.59
4380.23
6
5024.23
49
6000
5000
4000
Cash Flows
3000
Years
2000
1000
0
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
50
Years
NPV Millions
2012
421.4023885
1.044
403.642135
2013
518.7052523
1.08
480.282641
2014
625.7384025
1.13
553.750799
2015
743.4748678
1.18
630.063447
2016
872.9849796
1.24
704.020145
2017
1015.446103
1.29
787.167521
2018
1172.153338
1.35
868.261732
2019
1344.531297
1.41
953.568295
2020
1534.147051
1.47
1043.63745
2021
1742.724381
1.53
1139.03554
2022
1972.159444
1.6
1232.59965
2023
2174.0623
1.67
1301.83371
2024
2392.117384
1.75
1366.92422
2025
2627.616875
1.82
1443.74554
2026
2881.956325
1.9
1516.81912
2027
3156.642931
1.99
1586.25273
2028
3379.139082
2.07
1632.43434
2029
3614.985001
2.17
1665.89171
2030
3864.981677
2.26
1710.16888
2031
4129.978152
2.36
1749.99074
2032
4410.874416
2.47
1785.77912
2033
4708.624456
2.57
1832.14959
2034
5024.239499
2.69
1867.74703
2035
5358.791444
2.81
1907.04322
2036
5713.416505
2.93
1949.9715
SUM OF PV
32112.7808
16100
NPV
16012.781
51
Graph of NPV
NPV
45000
40000
35000
30000
25000
NPV
20000
15000
10000
5000
0
1%
2%
3%
4%
5%
6%
7%
8%
52
Years
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
Discount Rate @
5%
1.05
1.1
1.15
1.21
1.27
1.34
1.4
1.47
1.55
1.62
1.71
1.79
1.88
1.97
2.07
2.18
2.29
2.4
2.52
2.65
2.78
2.92
3.07
3.22
3.38
SUM OF PV
CASH OUT FLOW
NPV
NPV Millions
401.3356081
471.5502294
544.12035
614.4420395
687.3897477
757.7955989
837.2523841
914.6471405
989.7722911
1075.755791
1153.309617
1214.559944
1272.402864
1333.815672
1392.249432
1448.001344
1475.606586
1506.243751
1533.722888
1558.482322
1586.645473
1612.542622
1636.560097
1664.220945
1690.359913
29372.78465
16100
13272.78465
53
Years
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
NPV Millions
383.0930804
428.6820267
470.4800019
509.2293615
542.2266954
573.698363
604.2027514
628.2856526
652.8285324
672.8665565
691.98577
694.5885943
693.3673577
693.3026055
691.1166246
687.7217714
669.1364518
651.3486489
632.5665592
614.5800822
596.0641103
578.4550929
561.3675417
544.5926264
527.5546173
14993.34148
16100
-1106.658524
54
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
IRR
35000
30000
25000
20000
15000
10000
IRR
5000
0
-5000
2%
4%
6%
8%
10%
12%
14%
16%
-10000
-15000
55
56
PROFITABILITY INDEX
57
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%
58
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 generate
huge profits for the fauji cement.
59
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.
60
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
61