ITC CASE

ITC ltd. is a well-diversified conglomerate operating in many different segments like tobacco, hospitality,
food etc. In the food segment, they are the market leaders in Packaged wheat flour segment with their
brand name of Aashirvaad. To have the synergy in operations the company has already gone for
forward integration by entering into Packaged Biscuits segment with the brand name of Sunfeast and in
a very short period they have become a major player in this segment. To further enhance this segment
the company wants to come out with the branded breads.

Mr. Sanjiv Puri the current Chief Operating officer and Director for FMCG segment called for the
meeting of the top management to discuss the above issue and also requested Mr. Rajiv Tandon the
Chief Financial Officer of the company and his team to prepare the financial estimates.

On the day of the meeting Mr. Vineeth the head of Marketing, foods division started with his
presentation and showed the available market and the market feasibility of launching the Breads
segment. Next was the turn of the finance team to present the proposed investment for the project and
also present the financial feasibility of the project.

Finance team - Seeing to the demand supply gap and easy availability of raw material the company plans
to set up a plant in northern part of the country. The state government has agreed to give the land on
10 years lease with a subsidized annual rental of $5000000. The installed capacity of the plant would be
400000 loaves of 500 grams each per day with an expected life of 10 years. The proposed Investment
details for the project is as below:

Investment Details
Particulars Amount
Building with prefabricated structure 50000000
Equipment 75000000
Total Capital Expenditure 125000000
Working Capital 25000000
Total Investment 150000000

The plant will have an annual installed capacity of 120000000 loaves of 500 grams each (400000 loaves
per day * 300 operational working days per year). Seeing to the market forecast the capacity utilization
during the 10-year working life of the project is expected to be given below:

Capacity Utilisation over 10 years working life

% of
Capacity
Years utilized
1-2 50%
3-5 75%
6-10 100%
Seeing to the current competition in the market the per 500 gms loaf expected price would not be more
than $1 netting a contribution of 60%. The annual Fixed cost, excluding depreciation, are estimated to
be $20000000 from the 6th year onwards for the first two years it would be $10000000 per annum and
for the third to fifth year it would be $15000000 annually. The annual rate of depreciation being 10% of
cost of Fixed Assets.

The estimated terminal value of the Fixed assets at the end of 10-year life would be 10% and 100% for
Working Capital. The Finance team has estimated 12% as the opportunity cost of capital to be invested
in the project and the Corporate Tax rate prevailing in the country being 30%.