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CAPITAL BUDGETING OF FAUJI CEMENT

2013
FAUJI CEMENT
SUMITTED TO: CH. MAZHAR HUSSAIN

SUBMITTED BY:
AMIR UR RAHMAN 5280
TARIQ FAROOQ
SYED KHURRUM SHAHZAD 5276
SYED AHMAD BLAL 5275

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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 SIR 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.
















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TABLE OF CONTENTS
Chapter No. 1
Executive Summary......6
Introduction..7
Company History......8
Business.......9
Vision.......9
Mission.................9
Product.....9
Code of conduct......10
Core responsibilities....10
Our values...10
Statement of corporate governance.....11
Chapter No. 2
Capital Budgeting....15
Independent Project...........15
Mutually Exclusive Project........15
Capital Budgeting Method.....16
Payback .16
Net Present Value......17
Profitability Index.....18
Internal Rate of Return..18
Interpolation.....18

Chapter No. 3
Project Introduction...20
Introductions ................27
Capital structure of the project..27
Assumption....................28
Initial investment.......29
Cash flows.....30
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Terminal cash flow...35

Chapter No. 4
Cost of capital ....37
Structure of the project....38
Cost of Debt ....39
Cost of Equity...39
Calculation of WAAC......40
Chapter 5
Payback...42
Discounted pay back...44
NPV.45
IRR..46
Selection..50
Chapter 6
Risk and capital budgeting..51
Break even analysis..51
Sensitivity analysis...52
Risk adjusted discounted rate..53
Chapter 7
Leverage and capital structure
Leverage...55
Degree of Operating leverage..56
Degree of debts leverage .57
Degree of total leverage...58
Expected EPS and coefficient of EPS..59
Conclusion ..60
References ...................................61
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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, 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








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CHAPTER # 1 COMPANY INTRODUCTION
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, Fouji cement company, main branch is located
at Rawalpindi, and it is a headquartered, they operates a cement plant jhang Bahterm,
Tehsil Fateh Jhang & district Attock in the provinces 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.
Fouji 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 1.170 million tons of
cement. By producing the high quality of cement, government also preferred to use fouji
cement in construction of Highways, Bridges, commercial & Industrial complexes,
Residential homes & other structures.
COMPANY HISTORY

Fauji Cement Company Limited was sponsored by Fauji Foundation and incorporated as a
public limited company on 23 November 1992. It obtained the Certificate of
Commencement of Business on 22 May 1993. A longtime leader in the cement
manufacturing industry, Fauji Cement Company, headquartered in Islamabad, operates a
cement plant at Jhang Bahtar, Tehsil Fateh Jang, and District Attock in the province of
Punjab.
Fauji Cement is operating two lines of Cement Plants, one each from FLS Denmark &
POLYSIUS Germany. The plants are well renowned for their high efficiencies, best quality
production and are well maintained with annual total production capacity of 3.3 million tons
of cement. FAUJI Cement enjoys the reputation of being the Best Quality Cement in the
Country and is preferred in the construction of Mega Projects like Dams, Bridges,
Highways & Motorways, Commercial & Industrial complexes, Residential Housing Societies,
and a myriad of other structures needing speedy strengthening bond, fundamental to
Pakistan's economic vitality and quality of life.
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In addition to the Pakistan market, Fauji Cement is expanding its promising coverage in the
neighboring regions /countries like Sri Lanka, India, Afghanistan, South Africa, and Middle
East & Africa.
OUR 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.

OUR MISSION:

While maintaining its leading position in quality of cement maximizes profitability through
reduced cost of production and enhanced market share.
OUR VISSION:

To be a role model cement manufacturing Company, benefiting all stake holders and
fulfilling Corporate Social Responsibilities while enjoying public respect and goodwill.
PRODEUCTS:

We offer Ordinary Portland Cement (OPC) that is used in all general constructions,
especially in major and prestigious projects where cement is needed to meet stringent
quality requirements. It can also be used in concrete mortars and grouts, etc. Ordinary
Portland cement is compatible/consumable with admixture/ retarders, etc.
OPC has easy workability and lower heat of hydration. We maintain our technical standard
of quality parameter at high level and with high strength at all ages. Our OPC cement
satisfies ASTM-C-150, Type I and ASTM-C-150, Type I.
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Ingredients:



- Clinker 95%
- Gypsum 5%
28 days compressive strength up to 10000 psi
OUR CODE OF CONDUCT:

It has been said that the essence of a successful and visionary company is the ability to
preserve its core values and to stimulate progress. Corporate ethics is the practice of our
shared values. These shared values define who we are and what we can expect from each
other. It is a code which applies to all employees and consists of standards decided by
Allah and His Messenger (PBUH).
CORPORATE RESPONSIBILITY:
1.1. The key to corporate integrity lies with all of us. Everyone has a
responsibility to uphold dedication to corporate ethics on daily basis. We all
must:-
Know and follow this code in letter and spirit.
Know and comply with our professional obligations.
Take responsibility of own conduct.
Report violations of this code to management appropriately.
1.2. This statement defines following broad corporate values that shape our
business practices.
OUR VALUES
We listen to our customers and improve our product to meet their present and
future needs.
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.
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We expect superior performance and results. Our leaders set clear goals and
expectations, are supportive and provide and seek frequent feedback.
We support the communities where we do business, hold ourselves to the highest
standards of ethical conduct and environment responsibility, and communicate
openly with public and FCCL employees.
STATEMENT OF CORPORATE
GOVERNANCE
1. The company always encourages representation of independent non-executive
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 & decision on meterial
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 NO. 2











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CHAPTER # 2 CAPITAL BUDGETING
CAPITAL BUDGETING:
The process in which a business determines whether projects such as building a new plant
or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's
lifetime cash inflows and outflows are assessed in order to determine whether the returns
generated meet a sufficient target benchmark. Also known as "investment appraisal.
Ideally, businesses should pursue all projects and opportunities that enhance shareholder
value. However, because the amount of capital available at any given time for new projects
is limited, management needs to use capital budgeting techniques to determine which
projects will yield the most return over an applicable period of time.
Popular methods of capital budgeting include net present value (NPV), internal rate of
return (IRR), discounted cash flow (DCF) and payback period.
Steps in capital budgeting decision:
Proposal (feasibility report)
Financial analysis
Decision making
Follow up/ monitoring
PROJECT CLASSIFICATIONS
Capital Budgeting projects are classified as either Independent Projects or Mutually
Exclusive Projects.
1. Independent Project:
An Independent Project is a project whose cash flows are not affected by the
accept/reject decision for other projects. Thus, all Independent Projects which meet the
Capital Budgeting criterion should be accepted.
2. Mutually Exclusive Projects:
Mutually Exclusive Projects are a set of projects from which at most one will be accepted.
For example a set of projects which are to accomplish the same task. Thus, when choosing
between "Mutually Exclusive Projects" more than one project may satisfy the Capital
Budgeting criterion. However, only one, i.e., the best project can be accepted.
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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.

Unlimited Funds Vs. Capital Rationing:
The company may have unlimited access to capital in which case it can execute all
profitable projects simultaneously. However, in reality firms will have constraints on how
much funds they have to invest. If there are more capital projects then the funds
available, the firm will have to exercise capital rationing and prioritize the projects and
first execute those that have the highest impact on shareholders value.
CAPITAL BUDGETING METHODS
Many formal methods are used in capital budgeting, including the techniques
as followed:
Payback period
Discounted payback period
Net present value
Profitability index
Internal rate of return
Equivalent annuity
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Real options analysis
1) Payback period
Payback period in capital budgeting refers to the period of time required for the return on
an investment to "repay" the sum of the original investment. Payback period intuitively
measures how long something takes to "pay for itself." All else being equal, shorter
payback periods are preferable to longer payback periods.
The payback period is considered a method of analysis with serious limitations and
qualifications for its use, because it does not account for the time value of money, risk,
financing, or other important considerations, such as the opportunity cost.
Following formula can be used to calculate Payback period


2) Net Present Value:
The Net Present Value (NPV) of a Capital Budgeting project indicates the expected impact
of the project on the value of the firm. Projects with a positive NPV are expected to
increase the value of the firm. Thus, the NPV decision rule specifies that
all independent projects with a positive NPV should be accepted. When choosing
among mutually exclusive projects, the project with the largest (positive) NPV should be
selected.
The NPV is calculated as the present value of the project's cash inflows minus the present
value of the project's cash outflows. This relationship is expressed by the following
formula:

where
CFt = the cash flow at time t and
r = the cost of capital
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The example below illustrates the calculation of Net Present Value. Consider Capital
Budgeting projects A and B which yield the following cash flows over their five year lives.
The cost of capital for the project is 10%.
Project A
Year Cash Flow
0 $-1000
1 500
2 400
3 200
4 200
5 100

Net Present Value Project A:

3) Profitability Index:
Profitability index (PI), also known as profit investment ratio (PIR) and value investment
ratio (VIR), is the ratio of payoff to investment of a proposed project. It is a useful tool
for ranking projects, because it allows you to quantify the amount of value created per
unit of investment.
Following is the formula which is used for profitability index.
PROFITABILITY INDEX = PRESENT VALUE OF FUTURE CASH FLOW
INITIAL INVESTMENT
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.
4) Internal rate of return:
The Internal Rate of Return (IRR) of a Capital Budgeting project is the discount rate at
which the Net Present Value (NPV) of a project equals zero. The IRR decision rule
specifies that all independent projects with an IRR greater than the cost of capital should
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be accepted. When choosing among mutually exclusive projects, the project with the
highest IRR should be selected (as long as the IRR is greater than the cost of capital).

where
CFt = the cash flow at time t and
The determination of the IRR for a project, generally, involves trial and error or a numerical
technique. Fortunately, financial calculators greatly simplify this process.
The example below illustrates the determination of IRR. Consider Capital Budgeting
projects A and B which yield the following cash flows over their five year lives. The cost of
capital for both projects is 10%


Project A Project B
Year Cash Flow Cash Flow
0 $-1000 $-1000
1 500 100
2 400 200
3 200 200
4 200 400
5 100 700
Internal Rate of Return Project A:

Internal Rate of Return Project B:


Thus, if Projects A and B are
independent projects then both projects should be accepted since their IRRs are greater
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than the cost of capital. On the other hand, if they are mutually exclusive projects then
Project A should be chosen since it has the higher IRR.
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










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CHAPTER NO. 3












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CHAPTER # 3 PROJECT INTRODUCTION
PROJECT INTRODUCTION
The cement plant operating in the Fauji Cement is one of the most efficient and best
maintained in the Country and has an annual production capacity of 1.165 million tons of
cement. The quality portland cement produced at this plant is the best in the Country and is
preferred in the construction of highways, bridges, commercial and industrial complexes,
residential homes, and a myriad of other structures, fundamental to Pakistans economic
vitality and quality of life.
Erection & Commissioning of New Line with a Production capacity of 7200 TPD has been
completed and Plant has started its production on 30th May 2011. The Plant is equipped
with latest and state of the art equipment and is a great value addition in Pakistan Cement
Industry. Major Equipment Suppliers are;
a. POLYSIUS Germany
b. LOESCHE GmBH Germany (Vertical Cement Mills)
c. Havor & Boecker Germany (Packing Plant)
d. ABB Switzerland (Electrical Equipment & PLC)
In pursuance of its commitment to produce cement under stringent environment friendly
conditions, the Company has taken the lead by installing first ever Refuse Derived Fuel
(RDF) Processing Plant at a cost of Rs. 320 Million. This project acts as a beacon to the
entire industrial sector of the Country towards an environment friendly production; RDF is
not only providing economical fuel to the Company but also contributing towards solving
the problem of Municipal Garbage Disposal. Minimum 300-400 tons of garbage is being
lifted from each garbage dump located at Rawalpindi and Islamabad. In addition, the other
important advantages include reduced use of fossil fuel, lowering of green house gases in
the atmosphere and availability of compost fertilizer as a byproduct.
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 Cost of project cash outflow



CAPITAL STRUCTURE OF THE PROJECT
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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

Other relevant data of the two projects is given as below:
Cost of project A 22000 million
Cost of project B Cost of project
Project time period is 25 years
Rate = 35%
Debt to Equity Ratio = 0.55
Depreciation = 4%
Average Sale Increase = 12%
Average Price Per Ton = 3645
Average Capacity Utilization = 80%

ASSUMPTIONS
Due to new technology company sale will increase up to 12% in first 10 years of the
expansion. Then 9% increment will be made to the company sale to next five years
and at the end of last 10 years the company sale will increase to 6%.
Due to new technology company sale will increase up to 10% in first 10 years of the
expansion. Then 8% increment will be made to the company sale to next five years
and at the end of last 10 years the company sale will increase to 6%.

Project time period is 24 years
Gross profit is 30% of the sales.
Expenses include cost of goods sold and operating expenses excluding depreciation
that is total 73.9% of the sale.
Depreciation rate is assumed 4% on original over the whole file of machinery
It is assumed that prevailing interest rate in Pakistan is 14% on average.
Tax must be applied at the rate of 35%.
It is assume that the plant with be scrape value equal to 880 at the end of 24 and
this scrape is sold for the 1200.
Company is financing with the combination of debt and common stock. The cost of
debt before adjusting tax factor is 14% as interest is 14% too
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Average Price Per Ton = 3645

INITIANAL INVESTMENT OF PROJECT A

Amount in million (Rs.)
Cost of Asset

20,000
Installation Cost

2,000
Total cost of asset

22,000
Net working capital

0
Initial investment

22,000
INITIANAL INVESTMENT OF PROJECT B

Amount in million (Rs.)
Cost of Asset

15,000
Installation Cost 1,100
Total cost of asset 16,100
Net working capital 0
Initial investment 16,100


OPERATIOAL CASH FLOWS OF
PROJECT A

Financial year 2012 2013 2014 2015 2016 2017 2018
Revenue 6620.32 7414.758 8304.529 9301.073 10417.2 11667.27 13067.34
Expenses -4892.416 -5479.51 -6137.05 -6873.49 -7698.31 -8622.11 -9656.76
EBDIT 1727.9035 1935.252 2167.482 2427.58 2718.89 3045.156 3410.575
Depreciation -880 -880 -880 -880 -880 -880 -880
Earnings before interest
& Tax
847.90352 1055.252 1287.482 1547.58 1838.89 2165.156 2530.575
Interest -1694 -1694 -1694 -1694 -1694 -1694 -1694
Earnings before Tax -846.0965 -638.748 -406.518 -146.42 144.8896 471.1564 836.5752
Tax 296.13377 223.5618 142.2812 51.24699 -50.7114 -164.905 -292.801
Earnings After Tax -549.9627 -415.186 -264.237 -95.173 94.17827 306.2517 543.7739
Depreciation 880 880 880 880 880 880 880
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Net operating Cash inflow 330.03729 464.8138 615.7634 784.827 974.1783 1186.252 1423.774


Financial year
2019 2020 2021 2022 2023 2024 2025
Revenue
14635.42 16391.67 18358.67 20561.71 22412.26 24429.37 26628.01
Expenses
-10815.6 -12113.4 -13567.1 -15195.1 -16562.7 -18053.3 -19678.1
EBDIT
3819.844 4278.225 4791.613 5366.606 5849.601 6376.065 6949.91
Depreciation
-880 -880 -880 -880 -880 -880 -880
Earnings before interest
& Tax 2939.844 3398.225 3911.613 4486.606 4969.601 5496.065 6069.91
Interest
-1694 -1694 -1694 -1694 -1694 -1694 -1694
Earnings before Tax
1245.844 1704.225 2217.613 2792.606 3275.601 3802.065 4375.91
Tax
-436.045 -596.479 -776.164 -977.412 -1146.46 -1330.72 -1531.57
Earnings After Tax
809.7987 1107.747 1441.448 1815.194 2129.14 2471.342 2844.342
Depreciation
880 880 880 880 880 880 880

Net operating Cash inflow 1689.799 1987.747 2321.448 2695.194 3009.14 3351.342 3724.342



Financial year 2026 2027 2028 2029 2030 2031 2032
Revenue
29024.53 31636.74 33534.94 35547.04 37679.86 39940.65 42337.09
Expenses
-21449.1 -23379.5 -24782.3 -26269.3 -27845.4 -29516.1 -31287.1
EBDIT
7575.402 8257.189 8752.62 9277.777 9834.444 10424.51 11049.98
Depreciation
-880 -880 -880 -880 -880 -880 -880
Earnings before interest &
Tax 6695.402 7377.189 7872.62 8397.777 8954.444 9544.51 10169.98
Interest
-1694 -1694 -1694 -1694 -1694 -1694 -1694
Earnings before Tax
5001.402 5683.189 6178.62 6703.777 7260.444 7850.51 8475.981
Tax
-1750.49 -1989.12 -2162.52 -2346.32 -2541.16 -2747.68 -2966.59
Earnings After Tax
3250.912 3694.073 4016.103 4357.455 4719.288 5102.832 5509.388
Depreciation
880 880 880 880 880 880 880

Net operating Cash inflow 4130.912 4574.073 4896.103 5237.455 5599.288 5982.832 6389.388


F A UJ I C E ME NT L T D


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Financial year 2033 2034 2035 2036


Revenue
44877.32 47569.96 50424.15 53449.6


Expenses
-33164.3 -35154.2 -37263.4 -39499.3


EBDIT
11712.98 12415.76 13160.7 13950.35


Depreciation
-880 -880 -880 -880


Earnings before interest &
Tax 10832.98 11535.76 12280.7 13070.35


Interest
-1694 -1694 -1694 -1694


Earnings before Tax
9138.98 9841.759 10586.7 11376.35


Tax
-3198.64 -3444.62 -3705.35 -3981.72


Earnings After Tax
5940.337 6397.143 6881.358 7394.625


Depreciation
880 880 880 880



Net operating Cash inflow 6820.337 7277.143 7761.358 8274.625



OPERATIOAL CASH FLOWS OF
PROJECT B


Financial year 2012 2013 2014 2015 2016 2017 2018
Revenue
5793.2165 6372.538 7009.792 7710.771 8481.848 9330.033 10263.04
Expenses
-4284.663 -4709.31 -5180.24 -5698.26 -6268.09 -6894.89 -7584.38
EBDIT
1508.5536 1663.232 1829.556 2012.511 2213.762 2435.139 2678.652
Depreciation
-644 -644 -644 -644 -644 -644 -644
Earnings before interest &
Tax 864.55357 1019.232 1185.556 1368.511 1569.762 1791.139 2034.652
Interest
-1239.7 -1239.7 -1239.7 -1239.7 -1239.7 -1239.7 -1239.7
Earnings before Tax
-375.1464 -220.468 -54.1443 128.8113 330.0624 551.4386 794.9525
Tax
131.30125 77.16364 18.95051 -45.0839 -115.522 -193.004 -278.233
Earnings After Tax
-243.8452 -143.304

83.72732 214.5406 358.4351 516.7191
Depreciation
644 644 644 644 644 644 644

Net operating Cash inflow 400.15482 500.6961 608.8062 727.7273 858.5406 1002.435 1160.719


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Financial year 2019 2020 2021 2022 2023 2024 2025
Revenue
11289.34 12418.27 13660.1 15026.11 16228.2 17526.46 18928.57
Expenses
-8342.82 -9177.1 -10094.8 -11104.3 -11992.6 -12952.1 -13988.2
EBDIT
2946.518 3241.17 3565.286 3921.815 4235.56 4574.405 4940.358
Depreciation
-644 -644 -644 -644 -644 -644 -644
Earnings before interest &
Tax 2302.518 2597.17 2921.286 3277.815 3591.56 3930.405 4296.358
Interest
-1239.7 -1239.7 -1239.7 -1239.7 -1239.7 -1239.7 -1239.7
Earnings before Tax
1062.818 1357.47 1681.586 2038.115 2351.86 2690.705 3056.658
Tax
-371.986 -475.114 -588.555 -713.34 -823.151 -941.747 -1069.83
Earnings After Tax
690.8315 882.3552 1093.031 1324.775 1528.709 1748.958 1986.827
Depreciation
644 644 644 644 644 644 644
Net operating Cash inflow
1334.832 1526.355 1737.031 1968.775 2172.709 2392.958 2630.827

Financial year 2026 2027 2028 2029 2030 2031 2032
Revenue
20442.86 22078.29 23402.98 24807.16 26295.59 27873.33 29545.73
Expenses
-15107.3 -16315.9 -17294.8 -18332.5 -19432.4 -20598.4 -21834.3
EBDIT
5335.586 5762.433 6108.179 6474.67 6863.15 7274.939 7711.435
Depreciation
-644 -644 -644 -644 -644 -644 -644
Earnings before interest &
Tax 4691.586 5118.433 5464.179 5830.67 6219.15 6630.939 7067.435
Interest
-1239.7 -1239.7 -1239.7 -1239.7 -1239.7 -1239.7 -1239.7
Earnings before Tax
3451.886 3878.733 4224.479 4590.97 4979.45 5391.239 5827.735
Tax
-1208.16 -1357.56 -1478.57 -1606.84 -1742.81 -1886.93 -2039.71
Earnings After Tax
2243.726 2521.176 2745.911 2984.13 3236.642 3504.305 3788.028
Depreciation
644 644 644 644 644 644 644

Net operating Cash inflow 2887.726 3165.176 3389.911 3628.13 3880.642 4148.305 4432.028




F A UJ I C E ME NT L T D


25


Financial year

2033

2034

2035

2036
Revenue
31318.47 33197.58 35189.44 37300.8
Expenses
-23144.4 -24533 -26005 -27565.3
EBDIT
8174.121 8664.569 9184.443 9735.509
Depreciation
-644 -644 -644 -644
Earnings before interest & Tax
7530.121 8020.569 8540.443 9091.509
Interest
-1239.7 -1239.7 -1239.7 -1239.7
Earnings before Tax
6290.421 6780.869 7300.743 7851.809
Tax
-2201.65 -2373.3 -2555.26 -2748.13
Earnings After Tax
4088.774 4407.565 4745.483 5103.676
Depreciation
644 644 644 644

Net operating Cash inflow 4732.774 5051.565 5389.483 5747.676


OPERATING CASH FLOW OF A & B
GRAPHICAL PRESENTATION



0
1000
2000
3000
4000
5000
6000
7000
8000
9000
2
0
1
2
2
0
1
3
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
9
2
0
2
0
2
0
2
1
2
0
2
2
2
0
2
3
2
0
2
4
2
0
2
5
2
0
2
6
2
0
2
7
2
0
2
8
2
0
2
9
2
0
3
0
2
0
3
1
2
0
3
2
2
0
3
3
2
0
3
4
2
0
3
5
2
0
3
6
Project A Operating Cash Flows
Cash Flows A
F A UJ I C E ME NT L T D


26


TERMINAL CASHFLOWS
Project A:

After tax sale proceed from the plant:
sale proceed from new plant 1,200
Tax

112
Net sale proceeds 1,088
After tax sale proceed from old Assets 0
working capital 0
Net terminal Cash flow 1,088

Calculation of tax
Sale proceed of the plant 1200
Book value 880
Re-capturing depreciation 320
Tax payment 112
Project B:

After tax sale proceed from the plant:
sale proceed from new plant 900
0
1000
2000
3000
4000
5000
6000
7000
Project B Operating CashFlows
Project B Operating
CashFlows
F A UJ I C E ME NT L T D


27

Tax

89.6
Net sale proceeds 810.4
After tax sale proceed from old Assets 0
working capital 0
Net terminal Cash flow 810.4

Calculation of tax
Sale proceed of the plant 900
Book value 644
Re-capturing depreciation 256
Tax payment 89.6














F A UJ I C E ME NT L T D


28





CHAPTER NO. 4









F A UJ I C E ME NT L T D


29

CHAPTER # 4 COST OF CAPITAL
COST OF CAPITAL

The cost of funds used for financing a business. Cost of capital depends on the mode of
financing used it refers to the cost of equity if the business is financed solely through
equity or to the cost of debt if it is financed solely through debt. Many companies use a
combination of debt and equity to finance their businesses, and for such companies, their
overall cost of capital is derived from a weighted average of all capital sources, widely
known as the weighted average cost of capital (WACC). Since the cost of capital represents
a hurdle rate that a company must overcome before it can generate value, it is extensively
used in the capital budgeting process to determine whether the company should proceed
with a project.
Sources of financing:
Debts
Common Stock
Preferred Stock
Retain earning
CAPITAL STRUCTURE OF THE
PROJECT

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 debts:
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.

F A UJ I C E ME NT L T D


30

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%)).
In this project we assume that the company is paying 14% interest rate for the debt
portion. So the cost of debts of the can determine as:
Kd= Ki (1-Tax Rate)
Kd= 0.135(1-0.35)
Kd = .0.135(0.65)
kd =0.087
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
Dividend discount model:
A procedure for valuing the price of a stock by using predicted dividends and discounting
them back to present value. The idea is that if the value obtained from the DDM is higher
than what the shares are currently trading at, then the stock is undervalued.
Equation of Cost of Common Stock
Kc =D1/ P0 + g
F A UJ I C E ME NT L T D


31


'Capital Asset Pricing Model - CAPM':
CAPM (capital asset pricing model) is used to evaluate investment risk and rates of return
compared to the overall market. You can use CAPM to price an individual asset, or a
portfolio of assets, using a linear model defined as:

We assumed that:
Risk free Rate=0.1180
Market Rate=0.001
Beta=1.08
CAPM=RF+ (Rm-Rf)
CAPM=0.1180+1.08(0.001-0.1180)
CAPM=0.1180+ (-0.1263)
CAPM= -0.0083
COST OF CAPITAL BY USING
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.
WACC= (Cost of debt)*(weight of debt) + (Cost of proffered stock)*(weight of preferred
stock) + (cost of equity)*(weight of equity)
For calculation of weighted average cost of capital we first have to determine the
F A UJ I C E ME NT L T D


32

Cost of equity ke
Cost of Debt Kd
Cost of Kp
Weight of equity
Weight of debt
Weight of Kp
Capital sources Amount Weight
Cost WC
common equity 9,900,000,000 0.45
-0.0083
-0.003735
Debt 12,100,000,000 0.55
0.087 0.04785
Total 22,000,000,000 0.1
0.044115

Thus total cost of capital the project is 4.4115%











F A UJ I C E ME NT L T D


33










CHAPTER NO. 5







F A UJ I C E ME NT L T D


34

CHAPTER # 5 CAPITAL BUDGETING

PAYBACK PERIOD OF PROJECT A
Financial year Cash Flow Cumulated Cash Flows
0 -22000 -22000
1 330.03729 -21669.96271
2 464.8138 -21205.14891
3 615.7634 -20589.38551
4 784.827 -19804.55851
5 974.1783 -18830.38021
6 1186.252 -17644.12821
7 1423.774 -16220.35421
8 1689.799 -14530.55521
9 1987.747 -12542.80821
10 2321.448 -10221.36021
11 2695.194 -7526.16621
12 3009.14 -4517.02621
13 3351.342 -1165.68421
14 3724.342 2558.65779
15 4130.912 6689.56979
16 4574.073 11263.64279
17 4896.103 16159.74579
18 5237.455 21397.20079
19 5599.288 26996.48879
20 5982.832 32979.32079
21 6389.388 39368.70879
22

6820.337

46189.04579
23

7277.143

53466.18879
24

7761.358

61227.54679
25

8274.625

69502.17179

Pay Back Period = a + (b c)
D
Pay Back Period= 13+1165.6842/ 3724.342 = 13.31 years

F A UJ I C E ME NT L T D


35

PAYBACK PERIOD OF PROJECT B


















Pay Back Period = a + (b c)
D
Pay Back Period= 12+2101.21898/2392.958= 12.88 years



Financial year

Cash flows

Cumulated Cash Flows
0

-16100

-16100
1

400.15482

-15699.84518
2

500.6961

-15199.14908
3

608.8062

-14590.34288
4

727.7273

-13862.61558
5

858.5406

-13004.07498
6

1002.435

-12001.63998
7

1160.719

-10840.92098
8

1334.832

-9506.08898
9

1526.355

-7979.73398
10

1737.031

-6242.70298
11

1968.775

-4273.92798
12 2172.709 -2101.21898
13 2392.958 291.73902
14

2630.827

2922.56602
15

2887.726

5810.29202
16

3165.176

8975.46802
17

3389.911

12365.37902
18

3628.13

15993.50902
19

3880.642

19874.15102
20

4148.305

24022.45602
21

4432.028

28454.48402
22

4732.774

33187.25802
23

5051.565

38238.82302
24

5389.483

43628.30602
25

5747.676

49375.98202
F A UJ I C E ME NT L T D


36

DISCOUNTED PAYBACK PERIOD
OF PROJECT A
Financial year Cash Flow Discount rate (4.4%) Present
Value
cumulative discounted
cash flow
0 -22000 -22000 -22000
1 330.03729 0.95785441 316.1276724 -21683.87233
2 464.8138 0.91748506 426.4597187 -21257.41261
3 615.7634 0.87881711 541.1434119 -20716.2692
4 784.827 0.84177884 660.6507628 -20055.61843
5 974.1783 0.80630157 785.481495 -19270.13694
6 1186.252 0.77231951 916.1655677 -18353.97137
7 1423.774 0.73976965 1053.264792 -17300.70658
8 1689.799 0.70859162 1197.377407 -16103.32917
9 1987.747 0.6787276 1349.138757 -14754.19041
10 2321.448 0.65012223 1509.22494 -13244.96547
11 2695.194 0.62272244 1678.357779 -11566.6077
12 3009.14 0.59647743 1794.884097 -9771.723598
13 3351.342 0.57133854 1914.750831 -7856.972767
14 3724.342 0.54725913 2038.180177 -5818.79259
15 4130.912 0.52419457 2165.40165 -3653.39094
16 4574.073 0.50210208 2296.651572 -1356.739368
17 4896.103 0.48094069 2354.735158 997.9957898
18 5237.455 0.46067116 2412.744468 3410.740258
19 5599.288 0.4412559 2470.718866 5881.459124
20 5982.832 0.42265891 2528.69724 8410.156364
21 6389.388 0.4048457 2586.716241 10996.8726
22 6820.337 0.38778324 2644.812346 13641.68495
23 7277.143 0.37143988 2703.021125 16344.70607
24 7761.358 0.35578533 2761.377286 19106.08336
25 8274.625 0.34079054 2819.913939 21925.9973






F A UJ I C E ME NT L T D


37

DISCOUNTED PAYBACK PERIOD
OF PROJECT B

Financial year Cash Flows Discount rate (4.4%) Present Value cumulative discounted
cash flow
0 -16100 -16100 -16100
1 400.15482 0.95785441 383.2900575 -15716.70994
2 500.6961 0.91748506 459.381193 -15257.32875
3 608.8062 0.87881711 535.0293055 -14722.29944
4 727.7273 0.84177884 612.5854435 -14109.714
5 858.5406 0.80630157 692.2426356 -13417.47136
6 1002.435 0.77231951 774.2001117 -12643.27125
7 1160.719 0.73976965 858.6646874 -11784.60657
8 1334.832 0.70859162 945.8507665 -10838.7558
9 1526.355 0.6787276 1035.979271 -9802.776528
10 1737.031 0.65012223 1129.282459 -8673.494069
11 1968.775 0.62272244 1226.000368 -7447.493701
12 2172.709 0.59647743 1295.971883 -6151.521818
13 2392.958 0.57133854 1367.18912 -4784.332698
14 2630.827 0.54725913 1439.744105 -3344.588593
15 2887.726 0.52419457 1513.730296 -1830.858297
16 3165.176 0.50210208 1589.241456 -241.6168403
17 3389.911 0.48094069 1630.346137 1388.729297
18 3628.13 0.46067116 1671.374854 3060.104151
19 3880.642 0.4412559 1712.356178 4772.46033
20 4148.305 0.42265891 1753.318061 6525.778391
21 4432.028 0.4048457 1794.287466 8320.065857
22 4732.774 0.38778324 1835.290412 10155.35627
23 5051.565 0.37143988 1876.352699 12031.70897
24 5389.483 0.35578533 1917.498966 13949.20793
25 5747.676 0.34079054 1958.75362 15907.96155






F A UJ I C E ME NT L T D


38

Graphical presentation of discounted payback:







-18000
-16000
-14000
-12000
-10000
-8000
-6000
-4000
-2000
0
2000
4000
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 192021 22232425
Discounted payback B
Project A
-25000
-20000
-15000
-10000
-5000
0
5000
0 2 4 6 8 10 12 14 16 18 20 22 24
Discounted payback A
Discounted payback A
F A UJ I C E ME NT L T D


39

NET PRESENT VALUE:




NPV Of Project A NPV Of Project B
Financial
year
Present Value Financial
year
Present Value
0 -22000 0 -16100
1 316.1276724 1 383.2900575
2 426.4597187 2 459.381193
3 541.1434119 3 535.0293055
4 660.6507628 4 612.5854435
5 785.481495 5 692.2426356
6 916.1655677 6 774.2001117
7 1053.264792 7 858.6646874
8 1197.377407 8 945.8507665
9 1349.138757 9 1035.979271
10 1509.22494 10 1129.282459
11 1678.357779 11 1226.000368
12 1794.884097 12 1295.971883
13 1914.750831 13 1367.18912
14 2038.180177 14 1439.744105
15 2165.40165 15 1513.730296
16 2296.651572 16 1589.241456
17 2354.735158 17 1630.346137
18 2412.744468 18 1671.374854
19 2470.718866 19 1712.356178
20 2528.69724 20 1753.318061
21 2586.716241 21 1794.287466
22 2644.812346 22 1835.290412
23 2703.021125 23 1876.352699
24 2761.377286 24 1917.498966
25 2819.913939 25 1958.75362
Total 43925.9973 Total 32007.96155
NPV 43925.9973-22000 NPV 32007.96155-16100
F A UJ I C E ME NT L T D


40

CALCULATION OF IRR

Project A: Firstly we are calculating at lower discount rate which is 3%
Financial
Year
Cash Flow of Project A Discount Rate
(Assume 3%)
NPV (Millions)
0
1 330.0373 0.970873786 320.4246
2 464.8138 0.942595909 438.1316
3 615.7634 0.915141659 563.5107
4 784.827 0.888487048 697.3086
5 974.1783 0.862608784 840.3348
6 1186.252 0.837484257 993.4674
7 1423.774 0.813091511 1157.659
8 1689.799 0.789409234 1333.943
9 1987.747 0.766416732 1523.443
10 2321.448 0.744093915 1727.375
11 2695.194 0.722421277 1947.065
12 3009.14 0.70137988 2110.55
13 3351.342 0.68095134 2282.101
14 3724.342 0.661117806 2462.229
15 4130.912 0.641861947 2651.475
16 4574.073 0.623166939 2850.411
17 4896.103 0.605016446 2962.223
18 5237.455 0.587394608 3076.453
19 5599.288 0.570286027 3193.196
20 5982.832 0.553675754 3312.549
21 6389.388 0.537549276 3434.611
22 6820.337 0.521892501 3559.483
23 7277.143 0.506691748 3687.268
24 7761.358 0.491933736 3818.074
25 8274.625 0.477605569 3952.007
Total
54895.29
Investment 22000
NPV 32895.29



F A UJ I C E ME NT L T D


41

Secondly we are calculating at higher discount rate which is 8%
Financial
Year
Cash Flow of Project A Discount Rate
(Assume 5%)
NPV (Millions)
0
1 330.0373 0.925925926 305.5901
2 464.8138 0.85733882 398.5029
3 615.7634 0.793832241 488.8128
4 784.827 0.735029853 576.8713
5 974.1783 0.680583197 663.0094
6 1186.252 0.630169627 747.54
7 1423.774 0.583490395 830.7585
8 1689.799 0.540268885 912.9458
9 1987.747 0.500248967 994.3684
10 2321.448 0.463193488 1075.28
11 2695.194 0.428882859 1155.923
12 3009.14 0.397113759 1194.971
13 3351.342 0.367697925 1232.281
14 3724.342 0.340461041 1267.993
15 4130.912 0.315241705 1302.236
16 4574.073 0.291890468 1335.128
17 4896.103 0.270268951 1323.265
18 5237.455 0.250249029 1310.668
19 5599.288 0.231712064 1297.423
20 5982.832 0.214548207 1283.606
21 6389.388 0.198655748 1269.289
22 6820.337 0.183940507 1254.536
23 7277.143 0.170315284 1239.409
24 7761.358 0.157699337 1223.961
25 8274.625 0.146017905 1208.243
Total

25892.61
Investment

22000
NPV

3892.61

INTERPOLATION:
Interpolated Discount Rate = iL + (iH iL)(PV1 )
PVl -PVH

F A UJ I C E ME NT L T D


42

Interpolated Discount Rate = 0.03 + (0.08 0.03) (32895.29)
(32895.29-3892.61)
Interpolated Discount Rate = 0.03 + 1.134217
IIR= 1.164217
Project B: Firstly we are calculating at lower discount rate which is 3%
Financial
Year
Cash Flow of Project A Discount Rate (Assume
5%)
NPV (Millions)
0
1 400.1548

0.970873786 388.4998
2 500.6961

0.942595909 471.9541
3 608.8062

0.915141659 557.1439
4 727.7273

0.888487048 646.5763
5 858.5406

0.862608784 740.5847
6 1002.435

0.837484257 839.5235
7 1160.719

0.813091511 943.7708
8 1334.832

0.789409234 1053.729
9 1526.355

0.766416732 1169.824
10 1737.031

0.744093915 1292.514
11 1968.775

0.722421277 1422.285
12 2172.709

0.70137988 1523.894
13 2392.958

0.68095134 1629.488
14 2630.827

0.661117806 1739.287
15 2887.726

0.641861947 1853.521
16 3165.176

0.623166939 1972.433
17 3389.911

0.605016446 2050.952
18 3628.13

0.587394608 2131.144
19 3880.642

0.570286027 2213.076
20 4148.305

0.553675754 2296.816
21 4432.028

0.537549276 2382.433
22 4732.774

0.521892501 2469.999
23 5051.565

0.506691748 2559.586
24 5389.483

0.491933736 2651.269
25 5747.676

0.477605569 2745.122
Total

39745.43
Investment

16100
NPV

23645.43

F A UJ I C E ME NT L T D


43

Secondly we are calculating at higher discount rate which is 8%
Financial
Year
Cash Flow of Project A Discount Rate
(Assume 5%)
NPV (Millions)
0
1 400.1548

0.925925926 370.5137
2 500.6961

0.85733882 429.2662
3 608.8062

0.793832241 483.29
4 727.7273

0.735029853 534.9013
5 858.5406

0.680583197 584.3083
6 1002.435

0.630169627 631.7041
7 1160.719

0.583490395 677.2684
8 1334.832

0.540268885 721.1682
9 1526.355

0.500248967 763.5575
10 1737.031

0.463193488 804.5814
11 1968.775

0.428882859 844.3739
12 2172.709

0.397113759 862.8126
13 2392.958

0.367697925 879.8857
14 2630.827

0.340461041 895.6941
15 2887.726

0.315241705 910.3317
16 3165.176

0.291890468 923.8847
17 3389.911

0.270268951 916.1877
18 3628.13

0.250249029 907.936
19 3880.642

0.231712064 899.1916
20 4148.305

0.214548207 890.0114
21 4432.028

0.198655748 880.4478
22 4732.774

0.183940507 870.5488
23 5051.565

0.170315284 860.3587
24 5389.483

0.157699337 849.9179
25 5747.676

0.146017905 839.2636
Total

19231.41
Investment

16100
NPV

3131.405
Interpolation:
Interpolated Discount Rate = 0.03 + (0.08 0.03) (23645.43)
(23645.43-3131.405)
Interpolated Discount Rate = 0.03 + 0.057632

IIR= 0.107632
F A UJ I C E ME NT L T D


44

PROJECT SELECTION

Capital Budgeting Techniques Project A Project B
payback 13 years 12 years
discount payback 17 years 16 years
NPV 43926 32008
IRR 11.64% 10.70%
payback 13 years 12 years

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.
By comparing these two projects we found that Project NPV and IRR is much greater than
Project B so under taking this project will certainly generate huge profits for the fauji
cement.







F A UJ I C E ME NT L T D


45












CHAPTER NO. 6









F A UJ I C E ME NT L T D


46

CHAPTER #6 RISK AND CAPITAL BUDGETING
RISK ANALYSIS IN CAPITAL
BUDGETING
Capital budgeting is used to ascertain the requirements of the long-term investments of a
company. The different types of risks that are faced by entrepreneurs regarding capital
budgeting are the following:
Corporate risk
International risk
Stand-alone risk
Competitive risk
Market risk
Project specific risk
Industry specific risk

The following methods are used for Risk Analysis in Capital Budgeting:
Break Even Analysis
RISK ADJUSTED DISCOUNTED RATE
Sensitivity Analysis
BREAK EVEN ANALYSIS:
Break even cash inflow is the minimum level of cash inlow necessary for a project to be
acceptable that is NPV>0
Break even cash flow = initial investment /(PVIFAk,n)
Break Even of the project A:
Initial investment = 22000 (millions)
K (Rate) = 4.4%
N (time) = 25
Break even cash flow = 22000/ (PVIFA4.4%, 25) = 1468.43
Break Even of the project A:
Initial investment = 16100 (millions)
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K (Rate) = 4.4%
N (time) = 25
Break even cash flow = 16100/ (PVIFA4.4%, 25) = 1074.766 (millions)
If the company purpose is to minimize cost then must follow project B but if company is
looking for high profit then company must keep project A as project A takes time to gain
Break even.
SENSITIVITY ANALYSIS
A technique used to determine how different values of an independent variable will impact
a particular dependent variable under a given set of assumptions. This technique is used
within specific boundaries that will depend on one or more input variables, such as the
effect that changes in interest rates will have on a bond's price.

Sensitivity analysis is a way to predict the outcome of a decision if a situation turns out to
be different compared to the key prediction
Project A (millions) Project B(millions)
Initial investment 22000 22000
Outcomes Annual cash flows (millions)
Pessimistic 330 400
Most likely 3000 2000
Optimistic 8300 5800

Range of Project A = 8300 330 = 7970
Range of Project B = 5800 400 = 5400
By comparing range we again conclude that Project A is a better option as it is given more
return than Project B
Calculation of Range by NPV method:
Outcomes of Project A Outcomes of Project B
PVIFAn,k NPV PVIFAn,k NPV
Pessimistic 330 14.98203 -17056 400 14.98203 -16007
Most likely 3000 14.98203 22946 2000 14.98203 7970
Optimistic 8300 14.98203 102334 5800 14.98203 64900
Range 119390 Range 80907
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Project A is more risky than Project B but also has the possibility of a greater return as it is
shown in the above calculation.
RISK ADJUSTED DISCOUNTED RATE
An estimation of the present value of cash for high risk investments is known as risk-
adjusted discount rate. A very common example of risky investment is the real estate. Risk
adjusted discount rate is representing required periodical returns by investors for pulling
funds to the specific property. It is generally calculated as a sum of risk free rate and risk
premium. The variation of risk premium is depending on the risk aversion of investor and
the perception of investor about the size of propertys investment risk.
Risk-adjusted discount rate = Risk free rate + Risk premium
Under CAPM or capital asset pricing model

Under RACR NPV is calculated as
NPV = PV initial investment
Lets suppose that the initial cost of the project is same as discuss above that is 22000 and
16100. And other relevant information is given as below:
Year Project A (22000 millions) Project B (16100 millions)
1 8000 12000
2 12000 12000
3 18000 12000
4 30000 12000

Market risk (Rm) = 12
Risk free Rate (Rf)= 7
Beta (A) = 1.2
Beta (B) = 1.4
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Ka= 7%+1.2(12%-7%)
Ka= 13%
Kb= 7%+1.4(12%-7%)
Kb= 14%
NPVa= 8000(PVIF14,1)+12000(PVIF14,2)+18000(PVIF14,3)+30000(PVI
F14,4) - 22000
NPVa= 7018+9234+12150+17765 = 55267-22000= 33267 Millions
NPVb= 12000(PVIFA13,4)-16100 = 35694-16100=19594 millions

















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CHAPTER NO. 7












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CHAPTER #5 LEVERAGE AND CAPITAL
STRUCTURE
LEVERAGE
Leverage results from the use of fixed-cost assets or funds to magnify returns to the firms
owners. Generally, increases in leverage result in increased return and risk where as
decreases in leverage result in decreased return and risk.
There three basic types of leverages are used in finance
Operating leverage
Financial leverage
Total leverage
OPERATING LEVERAGE
A type of leverage ratio summarizing the effect a particular amount of operating leverage
has on a company's earnings before interest and taxes (EBIT). Operating leverage involves
using a large proportion of fixed costs to variable costs in the operations of the firm. The
higher the degree of operating leverage, the more volatile the EBIT figure will be relative to
a given change in sales, all other things remaining the same. The formula is as follows:

Formula method to calculate degree of operations:
DOL= TR- TVC
TR-TVC-FC
FINANCIAL LEVERAGE
A ratio that measures the sensitivity of a companys earnings per share (EPS) to
fluctuations in its operating income, as a result of changes in its capital structure. Degree of
Financial Leverage (DFL) measures the percentage change in EPS for a unit change in
earnings before interest and taxes (EBIT), and can be mathematically represented as
follows:

Formula method to calculate degree of Financial leavrage:
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DOFL = EBIT________________
EBIT I(PD*1/1-T)

TOTAL LEVERAGE

A leverage ratio that summarizes the combined effect the degree of operating leverage
(DOL), and the degree of financial leverage has on earnings per share (EPS), given a
particular change in sales. This ratio can be used to help determine the most optimal level
of financial and operating leverage to use in any firm. For illustration, the formula is:


Calculation of the these degrees is given as below:
OPERATING LEVERAGE
Lets suppose the company price per cement packet 3000. Whereas the company fix cost is
380000 and variable cost is 1000 per packet. The company made three different level of
sale 9000, 10000, 11000. We assumed further that the company is keeping 10000 sale
volumes as base and interest payment is 50000 so the calculation of financial leverage is as
given as below:
Base 9000 Base 10000 Base 11000
Sale 27000000 30000000 33000000
Variable cost 9000000 10000000 11000000
Fix cost 380000 380000 380000
Earnings Before Interest and tax
17620000 19620000 21620000


% change in EBIT -0.1019368 0.1019368
& change in sale -0.1 0.1

Degree of operation leverage 1.019367992 1.01936799
When DOL > 1 it means that degree of operation is existing. In above case DOL exist in both
situations as DOL is greater than 1.
Calculation of DOL by using formula method for 10000 volume.
DOL= TR- TVC
TR-TVC-FC
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DOL= 30000000 - 10000000
30000000-10000000-380000

DOL 1.019

FINANCIAL LEVERAGE

base 9000 base 10000 base 11000
Sale 27000000 30000000 33000000
Variable cost 9000000 10000000 11000000
Fix cost 380000 380000 380000
Earnings Before Interest and tax 17620000 19620000 21620000
less: interest 50000 50000 50000
Earnings Before Tax
17570000 19570000 21570000
Less: Taxes
-6149500 -6849500 -7549500
Earrings
11420500 26419500 14020500
No. of shares (supposed)
100000 100000 100000
Earnings Per Share
114.205 264.195 140.205
DOFL % change in EPS/% change in EBIT

% change in EPS -0.5677246 -0.46931244
%change In EBIT -0.1019368 0.1019368
DOFL 5.5693783 -4.60395503

Calculation by using formula method:
DOFL = EBIT________________
EBIT I(PD*1/1-T)

DOFL= 19620000
19620000-50000
DOFL= 1.002
The degree of financial leverage calculation shows that there financial leverage is existing
in both of the situations as the never in both case is more than or equal to 1.
TOTAL LEVERAGE
Degree of total leverage is the combination of DOL and DOFL so the degree of total
leverage can determine as
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Degree of total leverage = DOFL*DOL
1.002*1.019
1.021
EXPECTED EARNINGS PER SHARE
Many investors like to look at different numbers and ratios when evaluating a company.
There are many acronyms bandied about by so-called financial experts on television and
the radio; one term often used is EPS, which stands for earnings per share. Expected EPS
tells investors how much money per share outstanding a company is expected to make.
By the using the above same project we are now going to calculate expected earnings per
share and coefficient of variation of earning per share . For this purpose we suppose the
probabilities are:

Sale Probability
9000 .2
10000 .6
11000 .2
Expected earnings per share can be calculated as
Sum (EPS*probability)
EPS Probability Expected EPS
114 .2 22.8
264 .6 158.4
140 .2 28
Expected earnings per share 209

Coefficient of variation of EPS:
A statistical measure of the dispersion of data points in a data series around the
mean. It is calculated as follows:





The coefficient of variation represents the ratio of the standard deviation to the mean, and
it is a useful statistic for comparing the degree of variation from one data series to another,
even if the means are drastically different from each other.
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S.D = under root of (114-209)^2+(264-209)^2+(140-209)^2
S.D= under root of (9025+3025+4761) = 130
CVeps= 130/209= 0.622
BREAK EVEN

The break-even level or break-even point (BEP) represents the sales amountin either
unit or revenue termsthat is required to cover total costs (both fixed and variable). Profit
at break-even is zero. Break-even is only possible if a firms prices are higher than its
variable costs per unit. If so, then each unit of the product sold will generate some
contribution toward covering fixed costs.

BEunits = 380000/3000-1000 = 190 units




















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CHAPTER #6
CONCLUSION
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.



















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REFERENCES
www.fauji cement.com
www.investor pedia.com
Wikipedia
Fundamental of Financial Management by Brigham
Financial Reporting and Management Accounting by William J.B
Annual Reports of Fauji Cement
Nasir khan Finance executive of FFC

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