Project Appraisal & Financing

Project Appraisal & Financing

Final Project
Feasibility Study of New Business

Submitted to:
Prof: Hafiz Arslan
Submitted by & Reg no:

Zeshan Pervaiz G1F17MCOM0051

MuhammadYasir G1F17MCOM0014
Shahzaib Anayat G1F17MCOM0033
Muhammad Saqib G1F17MCOM0044
Muhammad Hamza G1F17MCOM0061
Umer Farooq G1F16MCOM0045

Class:
MCOM-IV
Date:
26th of June, 2019
University of Central Punjab
 Project Appraisal & Financing

Feasibility study of a new business

We are going to start a new business which is related to plastic industry.

Our company name is Pakistan Plastic Company and we make a feasibility report on our
business because we want to see this plastic industry is growing or not so then we take decision
to start this business.

In our feasibility study there are four departments

 Human Resource
 Marketing
 Accounting
 Finance

Human Resource Department:

In HR department 5 member are include whose hire the new employees which we need in other
departments and they follow these steps.

Step 1: Identify Vacancy and Evaluate Need

Step 2: Develop Position Description

Step 3: Develop Recruitment Plan

Step 4: Post Position and Implement Recruitment Plan

Step 5: Review Applicants and Develop Short List

Step 6: Conduct Interviews

Step 7: Select Hire

Step 8: Finalize Recruitment

Marketing Department
In marketing department 3 members are working whose make the budget of advertising and
branding.

They make plans to promote our company product and increase the revenue and profits.

Name Cost
Advertising 1000000Rs
Branding 620000Rs

University of Central Punjab

 Project Appraisal & Financing

Accounting Department
In accounting department 5 members are working and the responsibilities of them are following.

Collections: The accounting department is responsible for keeping track of overdue invoice
payments from customers, and uses a variety of methods to extract payment from them,
including dunning letters, phone calls, and attorney letters.

Financial statements: A reporting group within the department creates adjusting journal

entries to bring the company's initial financial results into compliance with the
applicable accounting framework, writes footnotes to accompany the financial statements, and
releases financials following the end of each reporting period.

Internal reporting: A cost accounting staff can provide considerable value by calculating
the profitability of various products, product lines, services, customers, sales regions, stores, and
so forth. The areas of analysis may change on a regular basis, so that management can view
different aspects of the business, with an emphasis on improving financial results.

Payables: The payables staff collects supplier invoices and employee expense reports, verifies
that the billed amounts are authorized for payment, and issues payments to recipients on
scheduled payment dates. These employees also watch for early payment discounts,

Taxes: A specially-trained group of accountants estimates the amount of taxable income that

the business is likely to generate, and periodically remits income tax payments to the
government, based on this estimated amount. The tax group also issues tax filings in a number of
other areas, such as franchise taxes, sales taxes, use taxes, and property taxes.

University of Central Punjab

 Project Appraisal & Financing

Finance Department
In this department only 3 members are working whose responsibility is to manage the company
money.

Capital Budgeting:

Capital budgeting is the process in which a business determines and evaluates potential
large expenses or investments. These expenditures and investments include projects such as
building a new plant or investing in a long-term venture. Often, a company assesses a
prospective project's lifetime cash inflows and outflows to determine whether the potential
returns generated meet a sufficient target benchmark, also known as "investment appraisal.

We will start our business on the basis of these terms

 NPV(Net present Value)

 IRR(Internal Rate of Return)
 PI(Profitability Index)
 PBP(Payback period)
 DPBP(Discounted Payback Period)

Net Present Value (NPV)

Net Present Value (NPV) is the difference between the present value of cash inflows and the
present value of cash outflows over a period of time.

IRR (Internal Rate of Return)

The internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability
of potential investments

PI (Profitability Index)
He profitability index is an index that attempts to identify the relationship between the costs and
benefits of a proposed project through the use of a ratio 

PBP (Payback period)

The payback period refers to the amount of time it takes to recover the cost of an investment.
Simply put, the payback period is the length of time an investment reaches a breakeven point.

University of Central Punjab

 Project Appraisal & Financing

DPBP (Discounted Payback Period)

The discounted payback period (DPP) is the amount of time that it takes (in years) for the initial
cost of a project to equal to discounted value of expected cash flows, or the time it takes to break
even from an investment. It is the period in which the cumulative net present value of a project
equals zero.

Net Present Value (NPV)

Calculations;
Assumes values

We have the run a company of plastic is considering an invest 7 Million Rs and to produce the
chairs and different design of plastic goods under 7 years contract for sale at 950 Rs per unit and
we produce 7300 units per first year and 7500 units for next 6 years. At the end of year 7 this
business is expected to scrap for 2 Million.

Variable cost= 600 Rs

Fixed cost= 1000000 Rs

Depreciation= 800000 Rs

Tax Rate = 40%

Require Rate of Return = 10%

Income Statement
Year 1 Year Year 7
2,3,4,5,6
Revenue (7300×950) 6935000 Rs (7500×950) 7125000Rs 7125000Rs
Less- Variable Cost (7300×600) (4380000Rs) (7500×600) (4500000Rs) (4500000Rs)
Less- Fixed Cost (1000000Rs) (1000000Rs) (1000000Rs)
= Gross Profit 1555000Rs 1625000Rs 1625000Rs
Less- Depreciation (1000000Rs) (1000000Rs) (1000000Rs)
= EBIT 555000Rs 625000Rs 625000Rs
Less- Tax 40% (222000Rs) (250000Rs) (250000Rs)
=EAT 333000Rs 375000Rs 375000Rs
+ Dep 1000000Rs 1000000Rs 1000000Rs
= Cash Flows 1333000Rs 1375000Rs 1375000Rs
Scrap 2000000Rs
3375000Rs

University of Central Punjab

 Project Appraisal & Financing

C Fo
NPV = – Initial Investment
( 1+ r )n

C F1 C F2 C F3 C F4 C F5 C F6 C F7
NPV = +1 + 2 + 3
( 1+ r ) ( 1+ r ) ( 1+ r ) ( 1+ r ) 4
+ 5 + +6
( 1+r ) ( 1+ r ) ( 1+ r ) 7

1333000 1375000 1375000 1375000 1375000 1375000 3375000

NPV = ( 1+ 0.1 )1 + ( 1+ 0.1 )2 + ( 1+ 0.1 )3 + (1+0.1 )4 ( 1+0.1 )5 + ( 1+ 0.1 )6 + ( 1+ 0.1 )7
+

NPV =1211818 + 1136364 +1033058 + 939144 + 853767 + 776152+ 1731909

NPV = 7682212 Rs – initial investment
NPV = 7682212 Rs – 70000000Rs
NPV = 682212 Rs
The NPV is positive that means we accept this project to start our business.

Profitability Index:
Initial Investment = 7000000Rs

Years Cash Flows Present value

1 1333000 1211818
2 1375000 1136364
3 1375000 1033058
4 1375000 939144
5 1375000 853767
6 1375000 776152
7 3375000 1731909

Present Value of future Cash Flows

PI =
Initial Investment

7682212
PI =
70000000

PI = 1.097

The PI is greater than 1 so we accept the project and start business.

Payback Period:

University of Central Punjab

 Project Appraisal & Financing

Years Cash Flows

1 1333000
2 1375000
3 1375000
4 1375000
5 1375000
6 1375000
7 3375000

Remaining Amount
Payback period = Full Year +
Next Year Cash Flow

167000
Payback period = 5 +
1375000

Payback period = 5.12 years

It is 7 years project and we get our investment 5.12 years.

Discounted Payback Period

Years Cash Flows Present value

1 1333000 1211818
2 1375000 1136364
3 1375000 1033058
4 1375000 939144
5 1375000 853767
6 1375000 776152
7 3375000 1731909

Remaining Amount
Payback period = Full Year +
Next Year Cash Flow

1049697
Payback period = 6 +
1731909

Payback period = 6 + .60

Payback period = 6.60 years

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 Project Appraisal & Financing

IRR (Internal Rate of Return)

Initial Investment = 7000000Rs

Years Cash Flows All Cash flows

Acc C.F =
1 1333000 No of Years
2 1375000
3 1375000 7000000
Acc C.F = = 4.23
4 1375000 1654714
5 1375000
6 1375000
7 Years Cash Flows
3375000 i= 11% PV1 i = 13% PV2
1 1333000 0.901 1301033 0.885 1179705
2 1375000 0.812 1116500 0.783 1076625
3 1375000 0.731 1005125 0.693 952875
4 1375000 0.659 906125 0.613 842875
5 1375000 0.593 815375 0.543 746625
6 1375000 0.535 735625 0.480 660000
7 3375000 0.482 1626750 0.425 1434375
7406533 6893080

NPA(1) = PV – Initial Investment

NPA(1) = 7406533 - 7000000

NPA(1) = 406533 i(1) = 11%

NPA(2) = PV – Initial Investment

NPA(2) = 6893080 – 7000000

NPA(2) = 106920 i(2) = 13%

University of Central Punjab

 Project Appraisal & Financing

IRR

NPV 1
= I 1+ × I +I
NPV 1 −NPV 2 2 1

406533
= 11 % + ×13 %−11%
406533−106920

406533
=11% + ×2 %
299613

=11 % +2.71 %

= 13.71%

The internal rate of return is 13.71%.

University of Central Punjab