Estimation of Total capital investment

Total capital investment, I=IF+IA+IW

=5265+1890+842
=7997 lakhs
Estimation of manufacturing cost
The manufacturing cost may be divided in to three items, as follows:
A. Cost proportional to Total cost investment
B. Cost proportional to production rate
C. Cost proportional to labour requirement
Estimation of cost proportional to total investment
This includes the factors, which are independent of production rate and
proportional to fixed investment such as:
Estimation of cost proportional to the Total Investment
S.No Items Fixed Costs in lakhs
Investments(%)
1. Maintenance and labour 3.0 179.94
2. Property Taxes 2.0 119.96
3. Insurance 1.5 86.97
4. Safety expenses 2.5 149.95
5. Protection, security and 1.5 89.97
first aid
6. General services, 1.5 89.97
laboratory, roads, etc.
7. Administrative services 3.0 179.94

For this purpose, we shall charge 15% of the installed cost of the plant
= (Installed cost *15)/100
= (5265*15)/100 =899 lakhs.
Estimation of cost proportional to the production rate
The factors proportional to the production rate are
Estimation of cost proportional to the production rate
S.No Items Production Cost in lakhs
rate
1. Raw material cost 15 1058.4
2. Utilities cost 20 1411.2
3. Maintenance cost 15 1058.4
4. Chemical, Ware house 10 705.6
expenses
Total 4233.6
Assuming that the cost proportional to the production rate is nearly 60%
of total capital investment,
Cost proportional to the production rate= (Total capital
investment*60)/100
= (7056*0.6)
=4233 lakhs
Estimation of cost proportional to the labour requirement
The cost proportional to labour requirement might amount to 10% of
total manufacturing cost.
Cost proportional to labour requirement= (899+4233) (0.1) / (0.9)
=570 lakhs
Therefore manufacturing cost= (899+4233+570)
= 5702 lakhs
Calculation of sales price of the product
Market price of Ammonia =
Profitability analysis
An analysis of cost and revenue to determine whether or not a venture
will make a profit, and, if so, how much. This is important information
in deciding on whether to make an investment. The length of time
required to repay the initial investment can be a critical factor.
Calculation of depreciation value
A measure of the decrease in value of an asset over a specific period of
time. This usually pertains to property such as real estate that can lose
value due to indirect causes such as the addition of new construction in
close proximity to the property, road additions or closures, a decline in
the quality of neighborhood, or other external factors.
According to sinking fund method: R= (V-Vs) I / (1+I)n
R =Uniform annual payments made at the end of each year
V =Installed cost of plant
Vs=Salvage value of the plant after n years
N =Life period (Assumed to be 12 years)
I =Annual interest rate (Taken as 12%)
R = (4813*0.12) / (1+0.12)12-1=148 Lakhs
Calculation of gross profit
A company’s revenue, minus its cost of goods sold. Gross profit is a
company’s residual profit after selling a product or service and
deducting the cost associated with its production and sale.
To calculate the gross profit: Examine the income statement, take the
revenue and subtract the cost of goods sold. Also called “Gross margin”
and “Gross income”.
Gross profit=Total sales income- manufacturing cost
=27111-5702
=21409 Lakhs
Calculation of net profit
A company’s total earnings (or profit). Net income is calculated by
taking revenues and adjusting for the cost of doing business,
depreciation, interest, taxes and other expenses. This number is found on
a company’s Income statement and is a measure of how profitable the
company is over a period of time. The measure is also used to calculate
earnings per share. It is defined as the annual return on the investment
made after deducting depreciation and taxes. Tax rate is assumed 40%.
Net profit= Gross profit-Depreciation-(Gross profit*Tax rate)
=21409-249-(21409*0.8)
=4032.8 lakh
Calculation of rate of annual return
The return an investment provides over a period of time, expressed as a
time weighted annual percentage. Sources of return can include
dividends, returns of capital and capital appreciation. The rate of annual
return is measured against the initial amount of the investment and
represents a geometric mean rather than a simple arithmetic mean.
Rate of return = (100*Net profit/Installed cost)
= (100*12596.4)/5265
=13.05%
Calculation of payback period
Payout period can be estimated by calculating the depreciable fixed
investment and dividing it to the total sum of profit and depreciation.
Payout period = Depreciable fixed investment / (profit +depreciation)
=5265/ (4032.8+249)
=1.29 Years.