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November 2007
Pre-Feasibility Study LPG Marketing & Distribution Business
DISCLAIMER
The purpose and scope of this information memorandum is to introduce the subject
matter and provide a general idea and information on the said area. All the material
included in this document is based on data/information gathered from various sources
and is based on certain assumptions. Although, due care and diligence has been taken to
compile this document, the contained information may vary due to any change in any
of the concerned factors, and the actual results may differ substantially from the
presented information. SMEDA does not assume any liability for any financial or other
loss resulting from this memorandum in consequence of undertaking this activity.
Therefore, the content of this memorandum should not be relied upon for making any
decision, investment or otherwise. The prospective user of this memorandum is
encouraged to carry out his/her own due diligence and gather any information he/she
considers necessary for making an informed decision.
The content of the information memorandum does not bind SMEDA in any legal or
other form.
DOCUMENT CONTROL
Document No. PREF-25
Revision 1
Prepared by SMEDA-Sindh
Approved by Provincial Chief - Sindh
Issue Date November, 2007
Issued by Library Officer
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1. P ROJECT PROFILE
Currently out of 25 million households in Pakistan, 4.3 million are connected to natural
gas network and the rest are relying on LPG and conventional fuels like coal, firewood,
kerosene, dung cake etc, which indicate the strong demand for Liquefied Petroleum
Gas (LPG) sector.
Liquefied Petroleum Gas (LPG) is used as fuel for cooking and heating in the northern
Pakistan particularly in Punjab. It is also used as fuel in vehicles particularly taxi and
rickshaws. More than 30,000 rickshaws and taxis in Karachi and other parts of the
country are run on LPG. The demand of LPG in Karachi is consistent throughout the
year and increases during winters in Punjab and Northern Pakistan.
Although demand of LPG is persistent throughout the year, supply of LPG from
producers (or extractors) to distributors and marketing companies has been limited due
to maintenance and overhauling shutdowns, which often creates shortages. Besides
that, LPG producers are also limited in numbers and LPG marketing companies need to
have a quota of gas to be allocated by the producer. This factor makes LPG business
vulnerable in the hands of LPG producers.
LPG (Liquefied Petroleum Gas) is the generic name for commercial propane and
commercial butane. These are hydrocarbon products produced by the oil and gas
industries. Commercial Propane predominantly consists of hydrocarbons containing
three carbon atoms, mainly propane (C3H8). Commercial Butane predominantly
consists of hydrocarbons containing four carbon atoms, mainly n- and iso - butanes
(C4H10).
LPG production is a capital intensive business and requires huge investment depending
upon the technology and methodology employed for the extraction and processing of
LPG. However, LPG Marketing and distribution needs comparatively less investment
and can be considered by the Small and Medium scale investors. The proposed project
envisages setting up of a LPG marketing and distributing company which is generally
known as LPG bottling plant business.
LPG marketing and distribution business will setup a bottling plant with storage tanks
and filling dispensers. The business facility will hold a certain quantity of LPG quota,
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allocated by one of the LPG producer and this allocated LPG will be supplied to the
marketing company through Bowzer (gas supplying trucks). The company will store
this LPG in its storage facility from where, supply to the sub-distributors will be made.
Sub-distributors will bring their cylinders and get them filled against payment.
There is no specific time for the entry in LPG marketing. After allocation of quota from
the producer, a marketing company can start its operations immediately as demand is
persistent in urban and rural markets.
The legal status of business tends to play an important role in any setup; the proposed
LPG Marketing and Distribution business is assumed to operate on as a private limited
company. It is mandatory for an oil or gas company to register as a private limited
company.
The capacity of the proposed LPG storage and distribution facilities would be around
80 M. Ton, whereas, filling capacity would be about 5 ton per day (based on 8 hours
shift).
A total of Rs. 48.92 million will be required to setup and operate the proposed LPG
Marketing and Distribution business.
Financial Summary
Project Cost IRR NPV (Rs) Payback Period Cost of Capital (WACC)
Rs. 48.92 million 28% 22.8 4 Years and 6 months 17.5%
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Location for setting up a LPG distribution plant has imperial implications on fixed
costs, operational costs and procedures. The proposed LPG plant can be established at
Port Qasim, Karachi in Sindh, and Multan Road in Punjab. These locations have basic
infrastructure and facilities required for LPG bottling and distribution plant, however
for the purpose of this pre-feasibility study Port Qasim industrial area has been
assumed.
LPG quota allocation: Most of the existing plants with fully operational
facilities are out of work because of delays in their quota allocation by the LPG
producers.
Survival during the critical period when cheap Irani LPG is available in the
market: In such circumstances when cheap Iranian gas is available, a LPG
marketing and distribution company may face a situation where it would be
forced to lift its quota as per agreement from the producer at a higher cost and
sell it at lower price.
In crude oil refining, the LP Gases are the first products produced on the way to making
the heavier fuels such as diesel, jet fuel, fuel oil, and gasoline. Roughly 3% of a typical
barrel of crude oil is refined into LP Gas although as much as 40% of a barrel could be
converted into LP Gas. Worldwide, crude oil refining is the source for the other 40% of
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LP Gas supplies although the ratio between gas processing and refining varies among
regions.
LP Gas production from these sources is a natural derivative. That means production of
LP Gas is assured since the primary motive for gas processors and refiners is to
produce fuels other than LP Gas but first the LP Gases are produced. Although tied to
the production of natural gas and crude oil, LP Gas has its own distinct marketing
advantages and can perform nearly every fuel function of the primary fuels from which
it is derived.
LP Gas can be transported, stored, and used virtually anywhere in the world. It does not
require a fixed network and does not deteriorate over time. LP Gas is very clean
burning and has lower greenhouse gas emissions than any other fossil fuel when
measured on a total fuel cycle. Originating mainly from natural gas production, it is
also non-toxic and will not contaminate soil or aquifers in the event of a leak.
LP Gas is cost-effective, since a high proportion of its energy content is converted into
heat. LP Gas can be up to five times more efficient than traditional fuels, resulting in
less energy wastage and better use of energy resources. LP Gas is a multi-purpose
energy. There are more than a thousand applications, from cooking, heating, air
conditioning and transportation, to cigarette lighters and even the Olympic torch.
The Government has focused on this sector and has approved “LPG production and
distribution policy 2006”. This policy aims at increasing LPG supplies, streamlining its
distribution at affordable prices, especially to LPG starved areas of the country and
promoting healthy competition or growth of LPG market while ensuring minimum
safety standards across the Liquefied Petroleum Gas supply chain. To achieve this goal,
issues regarding LPG production, LPG licensing, safety standards, pricing, distribution
in under developed areas and import of LPG have been addressed in this policy.
Prior to the announcement of the above policy, there has been a shortage of LPG
particularly during winter when most of the oil refineries shutdown their LPG
production operations for annual maintenance. Most of the refineries had a practice to
close LPG production at the same time which resulted in severe shortage leading to a
consequential increase in price. In order to avoid such situations, now it is mandatory
for the oil refineries to announce a schedule of maintenance ensuring a certain level of
LPG supply to the market.
Besides the oil refineries who produce LPG as a by product, some of the specialized
projects i.e. JJVL (Jamshoro Joint Venture Limited) are focusing on producing only
LPG which would help in consistent supply of LPG to the marketing and distribution
companies. It is expected that second facility of JJVL will commence its operations
shortly.
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LPG LICENSING
Any company willing to distribute and market Oil and Gas needs to obtain a license
from OGRA. Additionally, license from Explosive department is also required for the
proposed LPG marketing and distribution business. OGRA (Oil & Gas Regulatory
Authority) issues provisional licenses to technically and financially sound applicants/
parties for construction of works commensurate with their work program, for a period
of one year. OGRA inducts reputable third party inspectors to check/monitor
compliance with the terms and conditions of licenses.
The licenses can be cancelled in case of non-compliance with licensing terms and
conditions.
1
Oil & Gas Regulatory Authority
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2.2 .1 PRODUCTION2
The following table presents production data for the last two years for LPG, Petroleum
and Diesel.
It is evident from the table that LPG production which was around 40,895,000 liters
during the month of August 2005, increased to 41,124,000 liters during August 2006
which suggests a substantial increase in production. According to last year during July
and August LPG production was 85,450,000 liters, which decreased in during the same
period in 2006-07 around 82,999,000 liters. It is expected that after commencement of
operations of JJVL-II, the production will further increase which would help in
maintaining demand and supply gap in future.
2
Federal bereau of Statistics website ( http://www.statpak.gov.pk/depts/fbs/statistics/qim/qim.htm )
3
http://www.ogra.org.pk/cats_disp.php?cat=95
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Ratio B 40 60
LPG price calculation = A x B 21,040.00 31,560.00
Wt. Avg. price US $ /M. TON 526.00
Avg. US $ exchange rate for Feb. 07 Rs per US$ * 60.74
Maximum Base-Stock price of LPG Rs. /M. TON
effective March 03, 2007 31,949.45
2.2 .3 DEMAND
About 90% of auto rickshaw and taxi are fueled by LPG, whereas, majority of the rural
population of Pakistan use LPG as cooking and house warming fuel at home. LPG
prices move in a similar manner to petrol prices as its demand grows.
LPG Distributors Association Pakistan said on November 11, 2006, that the sale of
Liquefied Petroleum Gas (LPG) had dropped 30 percent due to unprecedented increase
in its prices by producer and marketing companies for the past 7 months4.
The association said that the LPG domestic consumers had abandoned its use and
turned to firewood while rickshaw owners and other transporters preferred petrol and
diesel as LPG firms had been fleecing them by constantly raising LPG rates without
any justification.
The LPG association chairman said that the price of a gas cylinder for domestic use in
neighboring India was Rs 236 while it was Rs 650 to 700 in our country (during
November and December 2006), which is reported to be self-sufficient.
LPG is much cleaner than diesel. The dirty black smoke that we see coming from diesel
vehicles is particulates – a known cause of sickness and deaths. By replacing a diesel
engine with an LPG powered equivalent, over 90 percent of this particulate matter can
be eliminated.
LPG powered vehicles emit significantly fewer greenhouse gases and other pollutants
than petrol-powered equivalents. LPG typically has around 20 per cent less ozone
4
Daily Times, Sunday, November 12, 2006.
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Rules and regulations which govern any explosive material also apply on LPG. Its
transportation, storage, construction of storage facility, filling of cylinders and their
transportation, etc. all need to be carried out according to the standards and
specifications provided by the explosive department, government of Pakistan. For LPG
business, a license will be required from explosive department of the concerned
province. Details have been provided in the following lines.
II) Application in the prescribed Form C, dully filled in and signed by the applicant.
III) Distance Form D, dully filled in against all columns there of as per schedule VI of
the Explosives Rules 1940 and signed by the applicant.
IV) Original treasury receipt for the amount payable as per column 5 of schedule IV
of the Explosives Rules, 1940 showing the amount paid under the following Head
of Account in any branch of the National Bank or Government Treasury.
5
http://www.lpg-mower.co.uk/lpg-groundscare-the-advantages.htm
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V) No objection certificate along with the signed plan from the District Authority
concerned to the effect that the Authority has No objection to the grant of license
to the application for possession/sale of Explosives. No objection certificate if not
submitted by the applicant will be obtained by the Department from the District
Authority after receipt of other complete particulars from the applicant.
VI) Six copies of plan duly signed by the applicant and drawn to scale on durable
paper showing full constructional details of the proposed LPG storage site, and
site with full surroundings and important land marks to facilitate its location. The
distances maintained around the proposed LPG storage site shall be marked
clearly.
VIII) Present consumption of explosives in the area and nature of work requiring use of
explosives.
IX) Expected market potential in 5 years from now with full justification.
X) Complete details of the present consumers of explosives in the area giving their
names, complete postal addresses, nearest Police station(s), approximate daily
consumption of explosives by each consumer stating their nature of work
requiring explosives.
XII) Any proof/certificate showing competence and experience of the applicant or his
authorized worker/agent/employee/supervisor in the handling of explosives.
XIII) Details of vehicle to be used for transport of explosives from source of supply to
the storage magazine and the approximate distance in between.
XIV) Undertaking by the applicant to the effect he will observe strictly all the
requirements of Explosives Rules 1940 and submit Fortnightly Reports on the
three prescribed Forms B-I, B-II, and B-III regarding purchase, use etc. of
Explosives.
6
LPG or other explosive storage site(s)
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XV) Certificate to the effect that guard over the magazine7 will be provided 24 hours
by the license.
An LPG tank after ten years shall be examined for re-qualification. Re-qualification is
a procedure by which a cylinder is inspected and retested to determine its acceptability
for continuous service. This method determines if a tank is condemned (a cylinder that
does not pass the required tests and can not be repaired), or, repairable. A tank shall be
repaired for cuts, corrosion or dents five years after the time of re-qualification. Repair
is defined as the removal and replacement of parts or attachments of LPG cylinders and
other corrective measures.
Consumers are enjoined to make sure that the embossed markings of the brand name or
name of the owner is printed on the cylinder.
To ensure safety throughout the LPG supply chain, LPG storage tanks, cylinders
bowzers, and distribution outlets of the licensees should meet the minimum safety
standards as laid down in applicable Rules.
Decanting of LPG from cylinder to cylinder is prohibited and OGRA can cancel
licenses of the LPG marketing companies involved in this activity directly or indirectly.
Following detailed guidelines have been provided by the explosive department of the
government for the companies dealing in explosive materials. It is mandatory for the
LPG businesses to comply with the following.
7
LPG or other explosive storage site(s)
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7. The explosives shall be covered with tarpaulins awaning so as to protect against sun
and rain and the margin of a pit shall be so raised as not to allow rainwater to drain
inside it.
8. Shelves, benches and fitting shall be of wood or bamboo free from iron nails and
grit.
9. The capacity of a pit or a cabin per 16 sq.ft. of the base area with 30% more area as
working space.
10.At least 6 feet high barbed-wire fencing shall be provided all round at a distance of
not less than 30 feet from the storage cabins/pits. Other safety distance shall be
maintained as per Schedule VI of the Explosives Rules, 1940.
8
Website of Explosive Department Sindh
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9
LPG or other explosive storage site(s)
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27. The vehicle shall NOT be driven at the speed more than 30 miles (50
Kilometers) an hour on smooth road.
28. Populated areas shall be avoided as far as possible and vehicle SHALL NOT be
parked in any building during journey.
29. The vehicle shall NOT be driven in any street or public place within the limits
of a municipality or cantonment except and in accordance with the conditions of a
written permit granted by the District Authority.
30. Explosives shall be delivered to authorize consignee only.
31. In case of any emergency, one person shall warn other traffic and one person
shall inform police, and the consignor or consignee, as may be convenient by the
quickest possible means.
32. One copy of the drawing approved by the Department of Explosives shall
always be kept with the driver of the vehicle for production on demand by an
inspecting officer.
3. MARKET INFORMATION
3.1 CURRENT MARKET
LPG’s use as fuel for cooking and household requirements is most common in the rural
areas of Punjab and NWFP (with a daily demand of about 500 to 800 ton). In the
southern region of the country, Karachi is the biggest consumer of LPG with an
approximate daily demand of about 250 to 300 ton. These indicative figures are
expressed by the LPG marketing company representatives and could vary based on
specific market circumstances.
Attraction for LPG among the commercial vehicle operators (particularly taxi and auto
rickshaw) in Karachi and other large cities & its demand in the rural areas of Punjab
which account for about 70% of the total demand makes the LPG sector an attractive
business. Following comparison of different fuels and their respective benefit analysis
gives a clear picture of the LPG attractiveness among the automotive users.
Petrol drive costs Rs. 5.25 per kilometer as against Rs. 1.75 for L.P.G and Rs. 1.25 for
CNG. On an average mileage of 40 kilometers, an average driver using LPG makes a
10
Based on discussions with the existing players
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saving of Rs. 140 per day, and for a CNG operated vehicle, the saving is Rs 160 per
day. This clearly suggests a cost benefit of LPG and CNG over petrol hence has a
greater attraction for vehicle operators.
With a view to ensure adequate supplies of LPG in remote, rural and hilly areas of the
country, and to halt deforestation, OGRA has ruled out a policy that all LPG marketing
companies receiving LPG from sources in Punjab and NWFP will be obligated to
supply at least 7% of their local LPG in Northern Areas, 7% in AJK and 6% in FATA.
All LPG marketing companies receiving LPG from sources in Sindh and Balochistan
will be obligated to supply at least 10% of their local LPG in Balochistan province.
At present, the following eight producers are producing around 1600 M. Tons of LPG
per day in the country.
11
www.mpnr.gov.pk
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Following table provides LPG producers with their production sites and quantity of
produce during 2006-07:
Data on LPG uplifted by the LPG marketing companies during past one year has been
provided in the following table:
12
www.mpnr.gov.pk
13
www.mpnr.gov.pk
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Marketing and distribution companies uplift LPG from the production site using
own/rented bowzers and store it at their storage site. In Karachi such sites are located at
Port Qasim, Hub, Super Highway etc. Marketing/distribution companies which are also
known as bottling companies fill gas cylinders with LPG and store them for
distribution. Appointed Distributors/Sub-distributors bring their gas cylinders on their
own vehicles on the marketing company site, get them filled (or exchange them with
the filled cylinders), make payment and carry their cylinders on the distribution point.
From their distribution points cylinders are supplied to the retailers or agents from
where it is provided to the end user. In case of household or commercial use small
capacity cylinders (normally 6 kg to 11.8 kg) are further filled and supplied to the users
directly by the sub-distributor. This filling process also be carried out at marketing
company site and sub-distributors uplift cylinders from the site and store them at their
location, from where they are distributed among households and commercial users i.e.
hotels etc.
There are three methods for the production of LPG: 1) Extracted from natural gas: 2)
By product of Oil refining process: 3) Produced during Oil refining process.
However, it should be noted that from natural gas, LPG can only be extracted from the
points where propane and butane is mixed with the natural gas in certain quantity. In
the following lines production/extraction process of LPG from natural gas has been
elaborated.
The patented AET Process LPG Recovery Unit technology utilizes non-cryogenic
absorption to recover C2+ or C3+ natural gas liquids (LPG’s) from natural gas
streams. The absorbed LPG’s in the rich solvent from the bottom of the LPG absorber
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column are fractionated in the solvent regenerator column which separates LPG’s
overhead and lean solvent produced at the bottom. After heat recuperation, the lean
solvent is pre-saturated with absorber overhead gases. The chilled solvent flows in the
top of the absorber column. The separated gas from the presaturator separator forms
the pipeline sales gas.
Depending upon the economics of ethane recovery, the operation of the AET LPG plant
can be switched on-line from ethane plus recovery to propane plus recovery without
affecting the propane recovery levels. The AET LPG plant uses lighter lean oils. For
most applications, there are no solvent make-up requirements. AET can design retrofits
for heavy lean oil facilities.
The only raw material for the LPG marketing and distribution business would be LPG.
For the proposed project, about 5 ton of LPG will be required as raw material on daily
basis at initial stages of the project. The requirement of LPG would increase by 10%
annually with an increase in supply with the same proportion.
For a LPG storage and distribution plant, technology options are important while
selecting filling equipment, storage tanks and filling pumps. For the proposed project
following technology options have been assumed:
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Technology Company/Supplier
Gas filling dispensers French Siraga
Pumps German CE Sterling
Storage Tanks Pakistani Descon Engineering
Siraga France and CE Sterling Germany can be contacted using the following URLs
http://www.siraga.com/siraga/siraga-contacts.php?langue=uk
http://www.sterlingfluid.com/sterlingsites/group/index.htm
Machinery required for the LPG distribution plant would include the following:
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There are few local suppliers/ manufacturer of storage Tanks and other related
machinery for LPG distribution setup. During the course of study for this pre-
feasibility, we have contacted the following local manufacturer and fabricator of LPG
distribution setup:
All machines require routine cleaning and maintenance after every three months and an
annual service which costs around 1% to 5% of the total cost depending upon the use of
the machine and operator's skill. We have assumed an average of 3% of the initial plant
and machinery cost as the annual maintenance cost.
The LPG storage and distribution site can be divided into three areas:
Administration block will consist of about 800 square feet area which will be used for
accounts, administration and other official purposes. LPG dispensing/filling area will
be used to fill cylinders. Four LPG dispensers will be installed at this place. It is
estimated that around Rs. 3 million would be required for the site development and
construction. Following table provides detailed breakup:
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As the plan and machinery to be installed on the site would be of permanent nature and
would be immovable for a longer period, it has been assume that the plot will be
purchased for the proposed business purpose. This will cost around Rs. 20 million.
6.1 EXPERIENCE
Dispatch Manager will be responsible for the collection, filling and dispatch of
cylinders to and from the sub-distributors. As the operations at LPG bottling site will be
of technical sort, it would need experienced staff for loading/unloading the product,
maintaining of storage tanks and compliance with the safety standards which would be
difficult if staff does not has relevant experience. It is proposed that staff with a
minimum of 2 to 3 years of relevant experience should be hired. It is also recommended
that the operations staff be provided with proper / regular training for handling of LPG.
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Land for setting up the proposed LPG Production & Distribution unit would be
purchased which will cost around Rs. 20 million {for a 2 Acre Plot at industrial area of
Port Qasim}.
For the site development, construction and renovation of office approximately Rs. 3
million will be required, which has been assumed to be depreciating at 10% per annum
using diminishing balance method.
To renovate the Plant / office premises in Year 5 and Year 10 a cost would incur for
which an amount equivalent to 5% of the total construction cost is estimated.
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7.5 UTILITIES
LPG Marketing and distribution business will be operated using electricity for plant
operations. This would draw considerable amount of electricity. The cost of the utilities
including electricity, diesel/fuel, telephone; and water is estimated to be around Rs.
1.35 million per annum. Breakup of the utilities expenses has been given below:
Total Annual
Total Monthly
Utility Annual %age
Cost (Rs.)
Cost (Rs.) Increase
1. Electricity 75,000 900,000 5%
2. Diesel for Vehicles 20,000 240,000 5%
3. Water 2,500 30,000 5%
4. Telephone 15,000 180,000 5%
Total 112,500 1,350,000
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A loading vehicle would be required for providing services for the transportation of
cylinders and staff traveling from different locations. For this purpose, a minimum of
two vehicles have been proposed which will cost around Rs. 400,000/- each.
Miscellaneous expenses of running the business are assumed to be Rs. 10,000 per
month. These expenses include various items like office stationery, daily consumables,
traveling allowances etc. and are assumed to increase at a nominal rate of 10% per
annum.
The proposed setup is assumed to maintain a minimum quantity of LPG to act as safety
stock against any shortage from supplier and to meet regular market demand. For this
purpose the storage facility will maintain 25 ton LPG at every point in time.
LPG business is carried out on cash basis and no credit policy factually does exist.
Therefore, no credit provisioning has been assumed, whereas, receivable period is also
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found to be almost zero. It has been assumed that the proposed business will initially
sell 5 ton LPG per day which will grow by 10% annually. Besides that, a 10% increase
in sales price has also been assumed on annual basis.
It is assumed that long-term financing for 5 years will be obtained in order to finance
the project investment cost. This leasing facility would be required at a rate of 15%
(including 1% insurance premium) per annum with 60 monthly installments over a
period of five years. The installments are assumed to be paid at the end of every month.
7.15 TAXATION
Particulars Rate
Required return on equity 20%
Cost of finance 15%
Weighted Average Cost of Capital 17.5%
The weighted average cost of capital is based on the debt/equity ratio of 50:50.
It is assumed that the owner will draw funds from the business once the desired
profitability is reached from the start of operations. The amount would depend on
business sustainability and availability of funds for future growth.
7.18 ANNEXURES
7.18.1 SUMMARY OF KEY ASSUMPTIONS
7.18.2 CO ST AND REVENUE SHEET
7.18.3 PROJECTED INCOME STATEMENT
7.18.4 PROJECTED BALANCE SHEET
7.18.5 PROJECTED CASH FLOW STATEMENT
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Pre-Feasibility Study LPG Marketing & Distribution Business
Page 2 of 32
PREF-25/November, 2007/Rev1
Pre-Feasibility Study LPG Marketing & Distribution Business
Page 3 of 32
PREF-25/November, 2007/Rev1