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2012

SELECTION OF FAUJI CEMENT


PLANT PROJECT THROUGH
CAPITAL BUDGETING

ZAHID, SOHAIB
FAUJI CEMENT
1/23/2012

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

SELECTION OF FAUJI CEMENT PLANT PROJECT


THROUGH CAPITAL BUDEGETING
BY
ZAHID HUSSAIN (REG # 4295-FMS/MBA/F09)
SOHAIB SALEEM (REG # 4262-FMS/MBA/F09)

MASTER OF BUSINESS ADMINISTRATION


(FINANCE)

SUBMITTED TO
CH. MAZHAR HUSSAIN

Department of Accounting & Finance


Faculty of Management Sciences
International Islamic University Islamabad
Jan 2012

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.

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

Calculations of 22000 M Project Tables


Net Cash Flow..35-37
Net Present Value..39
Internal Rate of Return.41-42
Pay Back Period.44

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

11

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

12

SELECTION OF FAUJI CEMENT PLANT PROJECT


THROUGH CAPITAL BUDEGETING
Executive summary
This project is about the selection of investment project using capital budgeting
techniques. We selected Fauji Cement Company to choose its production plant
project. This project has assigned to us as a complete course to provide
opportunity of gaining practical knowledge & using different techniques. The
nature of project is capital expenditure,

we will use different methods of

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.

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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.

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.

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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 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.

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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.

17

VALUES
Customers we listen to our customers and improve our product to meet
their present and future needs.

People our success depends upon high performing people working


together in a safe and healthy work place where diversity, development
and team work are valued and recognized.

Accountability we expect superior performance and results. Our leaders


set clear goals and expectations, are supportive and provide and seek
frequent feedback.

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STATEMENT OF CORPORATE GOVERNANCE


1. The company always encourages representation of independent nonexecutive 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 company.
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 been
appointed 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.

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Capital Budgeting Process


It involves six steps.
The cost of project is known.

Estimate the cash flow generated from the project and value of asset at the
end of its useful life.

Estimate the risk of cash flow.

The cost of capital should be known at which the cash flow is discounted.
It is based on project risk.

Determine the present value of cash flow.

At the last compare the present value of cash flow. If present cash flow is
greater than cost, the project is accepted.

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Capital Budgeting Methods


Many formal methods are used in capital budgeting, including the techniques such
as
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 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.

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.

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.

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


PVl -PVH

25

PAY BACK PERIOD


Payback period method focus on time period to receive cash outflow or initial
investment. 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

26

Weighted average cost of capital (WACC):


Weighted average cost of capital is what overall firm beard in capturing the total
finance 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 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

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%)).

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

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

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

Calculations of Net Cash Flow


2012
2013
2014
2015
2016
2017
2018
6.62E+09 7.42E+09 8.31E+09 9.302E+09 1.042E+10 1.167E+10 1.307E+10
6620.82 7415.32 8305.155 9301.774 10417.99 11668.14 13068.32
4647.815 5205.553 5830.219 6529.8452 7313.4266 8191.0378 9173.9623
1973.004 2209.764 2474.936 2771.9286
3104.56 3477.1072 3894.3601
262.1844 293.6466 328.8841 368.35024
1710.82 1916.118 2146.052 2403.5783
880
880
880
880
830.8196 1036.118 1266.052 1523.5783
1633.5
1633.5
1633.5
1633.5
-802.68 597.3821 367.4479 -109.9217
-280.938 209.0837 128.6068 -38.47258
-521.742 388.2983 238.8411 -71.44908
880
880
880
880
358.258 491.702 641.1589 808.5509

412.55227 462.05854 517.50557


2692.0077 3015.0487 3376.8545
880
880
880
1812.0077 2135.0487 2496.8545
1633.5
1633.5
1633.5
178.50774 501.54867 863.35451
62.477708 175.54203 302.17408
116.03003 326.00663 561.18043
880
880
880
996.03 1206.007
1441.18

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

Calculations of 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

Calculations of 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

1777.3 1883.91 1996.9 2116.8


11597
12293 13031 13812
880
880
880
880
10717
11413 12151 12932
1633.5 1633.5 1633.5 1633.5
9083.7 9779.5 10517 11299
3179.3 3422.83
3681 3954.6
5904.4 6356.68 6836.1 7344.3
880
880
880
880
6784.4 7236.7
7716
8224

37

Graph of Cash Flow


9000
8000
7000
6000
5000

Cash Flows

4000

Years

3000
2000
1000
0
1

11 13 15 17 19 21 23 25

38

Application of Capital Budgeting Techniques


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 @ 4.4%


1.044
1.08
1.13
1.18
1.24
1.29
1.35
1.41
1.47
1.53
1.6
1.67
1.75
1.82
1.9
1.99
2.07
2.17
2.26
2.36
2.47
2.57
2.69
2.81
2.93
SUM OF PV
CASH OUT FLOW
NPV

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

INTERNAL RATE OF RETURN


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

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

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


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 @ 10%


1.1
1.21
1.33
1.46
1.61
1.77
1.94
2.14
2.35
2.59
2.85
3.13
3.45
3.79
4.17
4.59
5.05
5.55
6.11
6.72
7.4
8.14
8.95
9.84
10.83
SUM OF PV
CASH OUT FLOW
NPV

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

PAY BACK PERIOD


Years
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

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

Pay Back Period = a + (b c)


D
Pay Back Period = 16 + (24074.35-21717.25)/ 22000
Pay Back Period= 16.11 years

44

PROFITABILITY INDEX

Profitability Index = Net Cash Inflows


Cash Out Flow

Profitability Index = 44066.15


22000

Profitability Index = 2.003

45

FAUJI CEMENT

CALCULATION OF
16100M PROJECT

46

Calculation of Net Cash Flow

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

Calculation of 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

Calculation of Net Cash Flow

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

Graph of Net Cash Flow

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

Application of Capital Budgeting Techniques

Years

Net Cash Flow

Discount Rate @ 4.4%

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

CASH OUT FLOW

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

INTERNAL RATE OF RETURN


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

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


421.4023885
518.7052523
625.7384025
743.4748678
872.9849796
1015.446103
1172.153338
1344.531297
1534.147051
1742.724381
1972.159444
2174.0623
2392.117384
2627.616875
2881.956325
3156.642931
3379.139082
3614.985001
3864.981677
4129.978152
4410.874416
4708.624456
5024.239499
5358.791444
5713.416505

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

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

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


421.4023885
518.7052523
625.7384025
743.4748678
872.9849796
1015.446103
1172.153338
1344.531297
1534.147051
1742.724381
1972.159444
2174.0623
2392.117384
2627.616875
2881.956325
3156.642931
3379.139082
3614.985001
3864.981677
4129.978152
4410.874416
4708.624456
5024.239499
5358.791444
5713.416505

Discount Rate @ 10%


1.1
1.21
1.33
1.46
1.61
1.77
1.94
2.14
2.35
2.59
2.85
3.13
3.45
3.79
4.17
4.59
5.05
5.55
6.11
6.72
7.4
8.14
8.95
9.84
10.83
SUM OF PV
CASH OUT FLOW
NPV

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

PAY BACK PERIOD


Initial
Years CF
NPV
Accumulative CF
0 22000M
1
403.642
2
480.283
883.9247756
3
553.751
1437.675574
4
630.063
2067.739022
5
704.02
2771.759166
6
787.168
3558.926688
7
868.262
4427.188419
8
953.568
5380.756715
9
1043.64
6424.394165
10
1139.04
7563.429708
11
1232.6
8796.029361
12
1301.83
10097.86307
13
1366.92
11464.78729
14
1443.75
12908.53283
15
1516.82
14425.35195
16
1586.25
16011.60468
17
1632.43
17644.03901
18
1665.89
19309.93072
19
1710.17
21020.0996
20
1749.99
22770.09035
21
1785.78
24555.86946
22
1832.15
26388.01906
23
1867.75
28255.76608
24
1907.04
30162.8093
25
1949.97
32112.7808

Pay Back Period = a + (b c)


D
Pay Back Period = 16 + (17644.03-16011.60)/ 16100
Pay Back Period=16.10

56

PROFITABILITY INDEX

Profitability Index = Net Cash Inflows


Cash Out Flow

Profitability Index = 32112.78


16100

Profitability Index = 1.99

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