Case Study

Read the case carefully and answer the following questions:

1. a. Estimate the cost of project indicating different broad cost heads.
b. Estimate the means of finance

2. Prepare the projected profitability statement for the first five years of operations.
3. Prepare the projected cash flows from long-term funds point of view for five years. Assume the terminal
value of fixed assets to be equal to the book value at the end of 5thyear.

4. Appraise the project using the following criteria:

a. Modified NPV
b. Modified IRR
c. Discounted pay-back period
The management of the company has decided to reinvest the intermediate cash inflows in government
securities at an average yield of 8%.
Phonex Chemicals Limited was incorporated under Companies Act 1956, on 11th April 2002 as a private limited
company. The company is planning to set up a production unit for Sodium Meta Bi-Sulphate and Sodium
Sulphate. The promoters have selected the location of the unit at Haldia in West Bengal. All infrastructural
facilities are available in this port city. This place is growing very fast to match with other newly promoted
industrial zones of India. Government of West Bengal is very keen to promote this area as the home for all
possible kinds of industries. Numerous MoUs have been signed between the Government of West Bengal and
almost all major industrial houses in the country. Some foreign companies are also showing interest in setting up
production units over there.
Phonex is promoted by Dr. P.K Salve, a PhD in inorganic chemistry. He has more than 20 years of experience in
chemical industry both in public and private sectors. After completing his B. Tech from IIT Kharagpur he
joined TISCO as a graduate trainee engineer. After working there for two years he left the job and took
admission in M. Tech at IISc Bangalore. He left IISc only after completing his PhD. After a brief stint of two
years as a lecturer in IIT Kharagpur, he joined Royal Chemicals in Liverpool, UK. Before venturing into his own
company he was working as Director (Operations) in Rastriya Chemicals and Fertilizers Ltd. The two primary
co-promoters of the project are Mrs. Sarda Salve and Mr. VikasSalve.
Mrs. Sarda Salve, wife of Dr. P.K Salve, is a Chartered Accountant. She had 20 years of strong working
experience in E & Y. At E & Y she was involved in the steel industry for the first five years. During her tenure

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in E & Y she got herself involved with different industries like: paints, pharmaceuticals, chemicals, fertilizers,
and steel. She left the job in the year 2000 as a senior consultant and got herself associated with Phonex.
Mr. Vikas Salve is the son of Dr. P.K Salve and Mrs. Sarda Salve. He is a mechanical engineer from RIT. He did
his MBA from IIM Bangalore. He had three years of working experience. He joined HLL as management trainee
in 1997. He left HLL as the marketing manager in eastern region.
The promoters have already made marketing arrangements with various clients in European and Latin American
countries. The technical know-how for manufacturing is also arranged from well known local sources. The
company has also formed a team of good repute for the day to day management.
The proposed installed capacity of the production unit would be 5000 MT of Sodium Meta Bi-Sulphate and 5000
MT of sodium sulphate per annum. The capacity utilizations for both the products are expected to be 60 %, 70
%, and 80 % in the first, second and third years respectively. The capacity utilization would be 90 % from the
fourth year onwards.
The company has engaged Anwesha Consultants as technical collaborators for this project. The Anwesha
Consultants has primarily agreed to:
 prepare project report
 provide technical expertise in selection of technology
 provide technical expertise in selection of plant and machinery
 provide detail engineering design data
 provide layout of works, detailed specifications of machinery.
The amount payable for obtaining this technical know-how and engineering services from Anwesha for setting
up this project has been agreed upon by both the parties at Rs.10.00lakhs.
Most of the plant and machineries are imported from Germany and France. Supplier of the indigenous plant and
machineries is Larsen and Toubro. Apart from the process equipments the company also requires necessary
equipments for one laboratory. The total cost of plant and machineries are estimated at Rs.354.76 lakhs.
The miscellaneous assets like telecom facility, computers, office furnitures etc. would cost the company Rs.10
lakhs.
The main raw materials required by the company are soda ash and sulphar, the current prices of which are as
follows:
 Soda ash – Rs.8,300 per MT
 Sulphar – Rs.2,800 perMT
To produce 5000 MT of Sodium Meta Bi-Sulphate one requires 2935 MT of Soda Ash and 1750 MT of sulphar
whereas to produce 5000 MT of Sodium Sulphate one would require 4430 MT of Soda Ash and 1300 MT of
Sulphar.
Consumables, primarily in the form of packings, are estimated to be Rs.400 per MT of final product.
The company is willing to buy industrial land to the extent of 2.81 acres from WBIDC. The basic cost of land
will come to the tune of Rs.15.12 lakhs. The costs associated with registration and stamp duty will amount to
28%. The details of proposed buildings and civil works are as given below:
 Main Process Building (10000 Sq ft) at a cost of Rs.37.89lakhs
 Sulphar Di-oxide Plant (900 Sq ft) at a cost of Rs.5.83lakhs.
 Sulphate Plant (320 Sq ft) at a cost of Rs.2.26lakhs.
 Auxilliary Buildings like workshop, laboratory, water supply house, time office etc. (10000 Sq ft) at a
cost of Rs.20.09lakhs.
The company has to cough up around Rs.10 lakhs for land leveling and development, laying approach roads and
internal roads, installing main gates and tubewells.
The power requirements at different levels of capacity utilizations are as follows:
Capacity 60% 70% 80% 90%
Requirement (Rs. in lakhs) 35.08 47.05 60.76 84.70
The furnace oil required per MT of final product is estimated to be Rs.1,000.
The company is proposing to recruit 58 direct labors and 15 administrative staff. Average monthly wages of
direct labors is Rs.1,660 and the salary for administrative staffs is Rs.1,967.Benefits of 20% of their
wages/salaries are to be provided for both categories and an annual increase of 5% in wages and salaries are to
be provided.
Other salient points of this project:
1. In order to meet escalation in cost, contingencies are to be provided at 10% on fixed assets yet to be
created, excluding land and site development expenses.
2. Other expenses prior to commencement of commercial production are as follows:
(Rs in lakhs)
Market survey fees 7.00
Trial run expenses 6.00
Insurance premium paid during construction period 2.00
Training expenses 2.00
Interest during construction period 20.00
Public issue expenses 22.00
3. The company proposes to avail a term loan of Rs.100 lakhs from ICICI at a rate of 15% per annum. The
term loan is to be repaid within 5 years, beginning from the end of second year, in equal annual
installments.
4. The promoters’ contribution to the project would be Rs.200 lakhs. The balance is to be raised through a
public issue of equity capital.
5. The selling prices of the final products are asfollows:
 Rs.11,700 for each MT of Sodium MetaBi-Sulphate
 Rs.13,750 for each MT of SodiumSulphate
6. The cost of repairs and maintenance for first year is estimated to be 1.5% of original costs of P&M, MFA
and contingencies. An increase of 5% is provided every year.
7. Depreciation rates:
Buildings Machineries/Other Assets
SLM (Company law purposes) 3.34% 10%
WDV (IT purposes) 10% 25%
The depreciation on technical know-how fees as per Sec. 32 is 25%.
8. Administrative overheads are estimated to be Rs. 50,000 per month with an increase of 5% every year.
9. Selling overhead is calculated at the rate of 3% on sales value.
10. Interest on bank borrowings for working capital is13.5%.
11. The following periodicities have been estimated for the computation of working capital:
Particulars Periodicity
Raw Material 1 month
Consumables 2 months
Finished Goods 0.75 month
Debtors 1 month
Expenses 1 month
12. It is assumed that 75% of working capital requirement will be financed by the WBIDC.
13. Margin money for working capital during first year should be included in the project cost.
14. Required return by the shareholders of the company is15%.
15. Tax rate applicable for the company is30%.