Assignment

Corporate Finance
SUBMITTED TO:
Prof. Fasial Rizwan

SUBMITTED BY:
Mohsin Shabbir (Reg. No. 4072) Muzamil Hussain (Reg. No. 4075)

EXECUTIVE SUMMARY
This feasibility study covers the marketing, technical and financial perspectives for launching a new business of tetra pack lassi in Pakistan. In this project we have focused upon how the launch of the new business in Pakistan poses a challenge, the technical and financial aspects of the product launch, and how the company needs to market it in order to make this launch a successful one. According to our information about the market, there is a substantial gap exist in the supply and overall demand of tetra packed lassi. A large number of Make-To-Drink (MTD) consumers are present in the market as well. MTD consumers market will also be targeted through proper advertisement compaigns and it is expected that 10% of the total MTD consumers market will be captured by the companys brand. This project of establishing a tetra pack lassi processing unit is being financed by both equity and finance. The portion of equity is 40% and debt is 60%. The rate of interest is negotiated at 14% as per bankers policy based on the current prevailing rate of interest on this type of projects in the market. This project total cost are Rs, 9594000. The 60% of this cost is take loan from bank at the interest rate is 14% and the remaining portion of the total cost is from equity, the cost of equity is calculate by 18.8 % and WACC is 13%. The NPV of the project is positive Rs.3584921 and its IRR rate is 42% MIRR is 27% and payback period is 2.4 years.

Introduction :
Lassi a popular and traditional yogurt-based drink of the Indian Subcontinent. It is made by blending yogurt with water and Indian spices. Traditional lassi is a savory drink sometimes flavored with ground roasted cumin while sweet lassi on the other hand is blended with sugar or fruits instead of spices. Pakistani cuisine is as diverse as its people. Among the drinks or beverages consumed in Pakistan, lassi, is quite popular. It is a traditional Pakistani dairy beverage, originally from Punjab, made by blending yoghurt with water, salt, and spices (depending on the type of lassi) until the drink becomes frothy. It is consumed by over one billion Asians throughout the world. With its smooth, cool and refreshing taste, it is the perfect accompaniment to the hot and spicy flavors that epitomize Pakistani cuisine. This traditional drink is economical and plentiful in Pakistan, where cows and buffalo provide an overflow of dairy-based recipes. Traditional lassi is sometimes flavored with ground roasted cumin. In Punjab lassi sometimes uses a little milk and is topped with a thin layer of malai, clotted cream. Lassi is enjoyed chilled as a hot-weather refreshment. With a little turmeric powder mixed in, it is also used as a folk remedy for gastroenteritis. Lassi was once the preserve of India's Maharajas. It is mentioned in ancient Indian texts and was widely used in Hindu rituals. In old times, people would have lassi because they wouldn't get hungry quickly afterward; and they could wait until lunch to eat again. Tart and refreshing, lassi serves to cleanse the palate alongside spicier foods. It aids digestion and is a healthy addition to any balanced diet. Lassi is 100 per cent natural and is free from artificial colorings, preservatives and flavorings. Besides offering health benefits, lassi is also indulgent and can be enjoyed with or between meals. There are many types of lassi that are now available. Sweet lassi is a more recent invention, and has become immensely popular. Rose water is a common ingredient for sweet lassi and adds a sweet, perfumed aroma. Sweet lassi can be flavored with any fruit of choice like mango, pineapple, banana, lychee, strawberry, etc. The traditional lassi is a salty yoghurt drink which has a thicker consistency as compared to buttermilk. It can be savored with various spices and ingredients, but it almost always includes ground cumin powder. Salty lassi is not only extremely easy and quick to make but also very refreshing and cooling to beat the heat of summer. MATERIAL INPUTS: To support the production operations, continuous supply of Milk plays a key role for the success in the Lassi business. Raw material required for manufacturing fress Lassi is milk, citric acid, food color, sugar, preservatives and fruit flavors. MILK PRODUCTION AND PROCUREMENT IN PAKISTAN: Pakistan has one of the highest per capita milk and dairy products consumption rates in Asia (150200 liters per year) and is the fourth largest milk producing country in the world with approximately 29-32 billion liters annual milk production. Higher milk yield is indeed a notable aspect of the milk sector. According to an expert, yield per animal has gone up from 700 liters per

year to 1,200 liters in the last six to seven years. This is significant in more than one way and opens the door of success wide for the livestock sector as also for national economy. Most of the milk in Pakistan is produced in the villages by farmers with small land holdings and also by landless agricultural laborers. Although an increasing portion of the milk produced is collected by the Supplier and other organized dairies, a significant portion of the milk is still being converted into traditional dairy products due to lack of refrigeration and transportation facilities. Conditions under which milk is produced in the villages are far from satisfactory, mainly because of the economic backwardness of the producers. The traditional raw milk marketing system is supplying rural and urban consumers quite effectively but its capacity is limited by the perishability of the product. Seasonal fluctuations in raw milk supply are met with dilution (lean season) during the marketing process or reduced procurement (flush season). The demand for liquid milk and dairy products in Pakistan will definitely continue to increase, the most important reason being growth of the human population. Other variables influencing demand are the growth of personal incomes and the evolution of prices. Pakistan will still have an excess demand that will need to be met by imports, unless the human population grows at a lower rate than in the past. Milk procurement is basically of two types : 1. Suppliers collection 2. Self collection 1. Supplier Milk collection system : In this case supplier brings milk with their own sources at factory. The milk is scrutinized by quality assurance department of dairy as per their standards. If milk pass all the quality test then this milk is received other wise the milk is rejected. 2. Self Milk collection system : Village Milk Collection (VMC) : In this case a local community nominated person (VMC agent) collect milk from local farmers on behalf of company by using company facilities. The VMC agent get commission from company on per litter collected milk. After collection VMC agent either himself approach the near by center of company for handing over of collected milk or company vehicle collect milk from that VMC agent as per written agreement. Very good quality milk is collected through the VMCs.. Target Segment: Major segments are basically those people who take this drink daily and those areas where the demands is higher then the other areas. There are so many people who take this drink daily and those people who take weekly and those who take less often are always there as well. So, their basic segments are those people who take this drink regularly. Market can be segmented on geographical and demographical basis.

Demographic knowing the cultural traits and characteristics of the Pakistani people and investigating their tastes in terms of drinks and beverages so that company will know how to adopt to certain changes in its products, operations and industry management to really cater the needs of the people trusting their business ways. Psychographics having a pattern or illustration with regards to the opinion and views of the Pakistanis so that the company could easily fit in to the type of culture and lifestyle they have. Positioning: Beverage and Fruit juice brands commercials basically focus on younger generations, because they want to represent Refresh Cola with the youth and energy. Company would adopt an aggressive approach mainly by brand differentiation, effective advertising and attractive brand initiatives. Price: Price of beverage and fruit juice brands vary from different size and amount. Prices offered by the company are genuine and readily accepted by the population too. This is all due to the increase rate of demand. Some times competitors change their product prices according to the season. Summer is supposed to be a good season for beverage and fruit juice industry in Pakistan. So in winter competitors reduce their prices to maintain their sales and profit. Placement & Distribution: It is literally impossible to supply the products to the consumer themselves due to the sheer volume of the demand, hence the company understands that marketing through suppliers is crucial for the availability of product. In Pakistan, company is managing and marketing the whole production distribution process.Through this decentralized channel the company is ensuring a smooth and efficient flow of the process which increases the performance of the company. Principal Inputs: Treated Water Yogurt milk Sugar Citric Acid Fruit Flavors Preservatives Investment Outlay & Production Cost: Total cost of the project is estimated at around Rs. 9594000. The working capital requirement is around Rs 793600 and the rest will be the fixed capital.

Use By Other Units: The proposed machinery and equipments are almost working in very efficient manner throughout the country in all the leading fruit juice manufacturing and processing plants. And it has been proved as the best for conducting similar operations effectively and efficiently. Basically, preparation process of juices involves the following steps: Boiling of milk Milk Storage in Tank Make the yogurt Mixing or blending the yogurt Syrup Storage in Tank Lassi Preparation Lassi Storage Tank Filling and Packaging Cooling and Storage

PROJECT ANALYSIS: Means of Finance (Rs.) Equity: 40% Debt: 60% There are a number of potential sources of finance to meet the needs of small and growing businesses: A key consideration in choosing the source of new business finance is to strike a balance between equity and debt to ensure the funding structure suits the business. The main differences between borrowed money (debt) and equity are that bankers request interest payments and capital repayments, and the borrowed money is usually secured on business assets or the personal assets of shareholders and/or directors. A bank also has the power to place a business into administration or bankruptcy if it defaults on debt interest or repayments or its prospects decline In contrast, equity investors take the risk of failure like other shareholders, whilst they will benefit through participation in increasing levels of profits and on the eventual sale of their stake. However, in most circumstances venture capitalists will also require more complex investments in additional to their equity stake. Total Cost of the Project: Machine Human Resource Furniture & Equipment Vehicles Utilities Working Capital Building Rent Total Cost 5409800 197000 450000 2250000 193600 793600 300000 9594000

S. No 1 2 3 4 5 6 7 8 9 10 11

Analysis of Individual Data for Starting Business Machine Requirment Required No. of Machine units Boiler 2 Air compresser 1 Stroage Tank 1 Blender 1 Lassi stroage Tank 2 Packing & printing machine 1 Electric generator 1 Cold storage Machine & Equip. 1 Tools & Equipment labortory Equip. & Water Treatment Installation Charges Total Machinery Cost

Total cost in Unit price $ Rs. 2 tons 800000 2600 226200 3000 261000 5000 liter 243600 3000 liter 522000 7500 pack 0f 250 ml/h 696000 200KVA 1500000 261000 261000 200000 200000 500000 5409800

The total machinery cost of the project is Rs. 5409800. In this coat we include the all machinery and equipment need foe this business, like boiler storage tanks, blinder, packing and printing machines and all transportation cost. Land & Building: Building Rent 1200000

We hire the building on rent because, if we construction over own building the total cost of the project was increase by at least 60% of total cost. So we decided we hire the building. Human Resource:

S. No. 1 2 3 4 5 4

Staff Title Business Unit Manager/Owner Selling & distribution Officer Accountant / Cashier Production Supervisor Electrician Chemist

No. of Persons 1 1 1 1 1 1

Monthly salary 40000 25000 15000 25000 8000 12000

Annual Salary 480000 300000 180000 300000 96000 144000

6 7 8 9

Skilled Workers Helpers Drivers Gourd Total factory Staff Total Salaries expenses

4 2 2 2 16

40000 12000 14000 6000

480000 144000 168000 72000

197000

2364000

The salaries cost of per month is Rs. 197000. And Rs. 2364000 per years of the project. It include all salaries of the employees and employer. Furniture & Equipment: Description AC Furniture Computer Printer Fax Scenner

S. No. 1 2 3 4 5 6

Unit 3 1 5 1 1 1

Cost 50000 350000 15000 10000 10000 5000

Total cost 150000 200000 75000 10000 10000 5000

Total Cost of Furniture & Equipment Vehicles S. No. 1 2 Description Delivery Truck Hand) Shehzor Total Vehicles Cost Units (Second 2 1 Cost 800000 650000

450000

Total cost 1600000 650000 2250000

For the purpose of deliver and collection of milk we need some vehicles like delivery truck and shehzor. The total cost for this purpose are Rs. 2250000. Utilities: S. No 1 2 3 4 Utility Electricity Gas Diesel for vehicles Water Total Monthly cost Annually Cost 130000 1560000 10000 120000 50000 600000 600 7200

Telephone Total Utility Cost

3000 193600

36000 2323200

To complete the require production we need some utilities like electricity, gas, telephone, and water. We assume that the total utility cost are Rs.2323200. Working Capitals:

S. No. 1 2 3

Working Capital Requirment first Two Months Salaries 400000 First Two Month Utility Charges 193600 Inventory (Raw material 2month ) 200000

Total working Capital Required

793600

The working capital required for the operation is assume are Rs. 793600.

Depreciation Schedules
MACRS Depricia tion Rate

Deprec iation S c hudel,s S .No. 1 2 3 4 Detail P acking & printing machine P lant & Machinery F urniture &O ffice E quipment Vehicles C os t 696000 2513800 450000 2250000

Years 1 2 3 4 5 6

Rates 0.2 0.32 0.19 0.12 0.11 0.06

Rates 0.33 0.45 0.15 0.07

Rates

0.1429
0.2449 0.1749 0.1249 0.0893 0.0892 0.0893 0.0446

P acking & printing machine Y ears Detail Depreciation R ates P acking & printing machine C umulative Dep's E nding B ook Value: C ost- Dep's 1 0.1429 99458.4 99458.4 596541.6 2 0.2449 170450.4 269908.8 426091.2 3 0.1749 121730.4 391639.2 304360.8 4 5 6 7 0.1249 0.0893 0.0892 0.0893 86930.4 62152.8 62083.2 62152.8 478569.6 540722.4 602805.6 664958.4 217430.4 155277.6 93194.4 31041.6 8 0.0446 31041.6 696000 0

Y ears P lant & Machinery Detail Depreciation R ates P lant & Machinery Dep's C umulative Dep's E nding B ook Value: C ost- Dep's 1 0.1429 359222.02 359222.02 2154577.98 2 0.2449 615629.62 974851.64 1538948.36 3 4 5 6 7 8 0.1749 0.1249 0.0893 0.0892 0.0893 0.0446 439663.62 313973.62 224482.3 224231 224482.3 112115.5 1414515.26 1728488.88 1952971 2177202 2401685 2513800 1099284.74 785311.12 560828.8 336597.8 112115.5 0

F urniture &O ffice E quipment Y ears Detail Depreciation R ates Vehicles C umulative Dep's E nding B ook Value: C ost- Dep's 1 0.2 90000 90000 360000 2 0.32 144000 234000 216000 3 0.19 85500 319500 130500 4 0.12 54000 373500 76500 5 0.11 49500 423000 27000 6 0.06 27000 450000 0

Vehicles Y ears Detail Depreciation R ates Vehicles Dep's C umulative Dep's E nding B ook Value: C ost- Dep's 1 0.1429 321525 321525 1928475 2 0.2449 551025 872550 1377450 3 0.1749 393525 1266075 983925 4 0.1249 281025 1547100 702900 5 0.0893 200925 1748025 501975 6 0.0892 200700 1948725 301275 7 0.0893 200925 2149650 100350 0.0446 100350 2250000 0

Loan amortization schedules: amount borrow: years: rate: PMT: Years 1 2 3 4 5

5756400 5 14% -1676744 Beginning amount 5756400 4885552 3892785 2761031 1470831 Payment 1676744 1676744 1676744 1676744 1676744 Interest 14% 805896 683977.3 544989.9 386544.3 205916.3 repayment Principal 870848 992766.7 1131754 1290200 1470828 of ending Balance 4885552 3892785 2761031 1470831 0

WACC:

Risk free rate: 12% Market risk free rate: 12.1% Industry beta: 0.68 Beta unlevered: 0.23 Beta levered: 0.45 Cost of equity: 18.8% Cost of debt: 14% WACC: 13%

Salvage Value of the project:

P acking & printing machine & Machineryurniture &O ffice E quipment P lant F V ehicles T otal E s temated Market value in 6th years 350000 1000000 200000 1700000 B ook V alue in 6th Y ears 93194 336597 0 301275 E xpected G ain or L os s 256806 663403 200000 1398725 T ax liabilites 102722.4 265361.2 80000 559490 Net c as h flow from s alvag e 247277.6 734638.8 120000 1140510 2242426

The total salvage value at the end of the 6th years life of the project is estimated by the Rs. 2242426. In this value include the salvage value of packing and printing machine, plant and others machinery, furniture and office equipments and vehicles.

P rojec t C as h flows Investment outlays at time Z ero P acking & printing machine P lant & Machinery F urniture &Office E quipment Vehicles Increasing Working C apital Installation C harges Transportion charges IC O Operating C as h F lows over the projec t's life: Y ears 0 1 2 3 4 S ales -7253400 7850000 8085500 8328065 8744468 -Operating cost(60% of sales) 3925000 4042750 4164033 4372234 Operating C as hflows 3925000 4042750 4164033 4372234 -Depreciation(MAC R S ) 870205.4 1481105 1040419 735929 Operating C as hflows before Tax 3054795 2561645 3123614 3636305 -Tax @ 35% 1069178 896575.75 1093265 1272707 Operating C as hflows after tax 1985616 1665069.25 2030349 2363598 Depreciation 870205.4 1481105 1040419 735929 Operating C as hflows 2855822 3146174.25 3070768 3099527 Terminal Years C as h F lows R eturn of net operating working capital Net S alvage Value Total Terminal C ash F low P rojec t C as h F lows 5 9181692 4590846 4590846 5370598 -779752 -272913 -506839 5370598 4863759 6 9824410 4912205 4912205 5140142 -227937 -79777.9 -148159 5140142 4991983 WAC C 13% R einvestment rate 10% Tax 35%

1 2 3 4 5 6 7

-696000 -2513800 -450000 -2250000 -793600 -500000 -50000 -7253400

793600 2242426 8028009

-7253400 2855822 3146174.25 3070768 3099527 4863759 8028009

NP V IR R MIR R payback P eriod

3584921 42% 27% 2.4

Conclusion: This project total cost is Rs, 9594000. The 60% of this cost is take loan from bank at the interest rate is 14% and the remaining portion of the total cost is from equity, the cost of equity is calculate by 18.8 % and WACC is 13%. The NPV of the project is positive Rs.3584921 and its IRR rate is 42% MIRR is 27% and payback period is 2.4 years. So the project is acceptable.