Project Report on The Neogi Chemical Company (NCC)

Project Planning and Appraisal Management

Group 5 WMG XVII B Shrikant Raju Abhishek Nagpal Varun Jain 82078 82085 82090

Introduction The Neogi Chemical company was established in 1988 as a private limited company. Under the ownership of Mr. Chaman Lal Neogi, the company has made significant progress and started planning for expansion with the ever growing profits and sales. The company was converted into a public limited company in 1994. Inspite of this huge success and continuous increasing margins, there is still a lot of scope of improvements in many areas like: a) The company has not been following a sophisticated approach in screening and evaluating its capital projects b) The finance committee does not follow a standard procedure to screen capital projects c) Lack of scientific techniques and methods for evaluating investment options and choosing right projects thereafter

Key Persons      Mr. Chaman Lal Neogi Chairman and Finance Controller of The Neogi Chemical Company Mr. Jagat Chief Accountant at the company Mr. Laxmi Chand Marketing Manager at the company Mr. Vinod Mittal Controller of Budgets at the company Mr. Pramod Production Manager at the company

Case Highlights y There is a mixed view among the top executives of the company on which method to choose for project appraisal. Each individual has his own view point depending upon his area of expertise and understanding of project appraisal and investment decisions. The top executives are discussing various discounting and non-discounting methods for project appraisal and selection and each has a valid point to defend his own method of calculation. Mr. Chaman Lal, tried to control the meeting and laid down his concerns over the company s current situation and the risk of raising debt at the rate of 15 percent per annum for financing any investment project It has now become an important area of concern for all the top executives to sit and discuss various methods of project appraising and decide the most suitable method for further projections

Methods used for Project Financing and Appraisal 1) Pay Back Period: It can be defined as the time taken by the cash inflows from a capital investment project to equal the cash outflows

Here, Ct = the net cash receipt at the end of year t Io = the initial investment outlay Advantages It involves a quick, simple calculation and an easily understood concept. Does not require calculations of cost of capital Used as a measure of risk and liquidity

Disadvantages It ignores the time value of money. It is not a good method to check the profitability of a project as it doesn t consider the overall life of the project It is unable to distinguish between projects with the same payback period. It may lead to excessive investment in short-term projects.

2) IRR Method: The IRR is the discount rate at which the NPV for a project equals zero. This rate means that the present value of the cash inflows for the project would equal the present value of its outflows. The IRR is the break-even discount rate. The IRR is found by trial and error.

Here, r = IRR Ct = the net cash receipt at the end of year t Io = the initial investment outlay

Assumption:-Intermediate cash flows generated by an investment are reinvested at the project s internal rate of return.

Advantage It is gives better accuracy in short terms projects It incorporates all the cash flows over the life of the project Adjust cash flows for the time value Does not require calculations of cost of capital Managers tend to better understand the concept of returns stated in percentages It is easy to compare to the required cost of capital.

Disadvantage It may give unrealistic results IRR can t be used to evaluate project where there are changing cash flows

3) NPV Method: It is used for evaluating the desirability of investments or projects

Here, Ct = the net cash receipt at the end of year t Io = the initial investment outlay r = the discount rate/the required minimum rate of return on investment n = the project/investment's duration in years Assumption:-Intermediate cash flows generated by an investment are reinvested at the rate of discount.

Advantage It consider cost of capital which is an ext factor. It is preferred over other methods as it calculates additional wealth. (IRR doesn t) NPV is calculated in terms of currency. NPV can evaluate big long term project in a better way. It helps investors in understanding the actual figures.

Disadvantage NPV using different discount rates will result in different recommendations. (IRR gives same) Should not be used for short term projects.

Calculation

The Neogi Chemicals

Cash Outflows Old Machine Purchase of New machine Less sale of old machine Net outflow Total outflow -45 New Machine 450 Net Outflow -450 45 -405 -405

Sales(692-510) Less : Direct cost Raw material(348-262) Labour(65-80) Less : Indirect cost Supervisoin power Rep& Maintenance

Incremental Cash Inflows Old Machine 510 262 80

New Machine 692 348 65 182 -86 15

8 15 4

6 11 5

2 4 -1

EBDIT/EBD

116

Year

EBDIT

(WDV) Depreciation

EBIT

Int

EBT

Tax@35%
3.85 13.04 19.93 25.10 28.97 31.88 34.06 35.69 36.92 37.84

PAT
7.15 24.21 37.01 46.61 53.81 59.20 63.25 66.29 68.57 70.28

PAT + WDV
112.15 102.96 96.07 90.90 87.03 84.12 81.94 80.31 79.08 78.16 -32 25

PVF
0.878425861 0.771631993 0.677821498 0.595415933 0.523028753 0.459441983 0.403585719 0.354520133 0.311419653 0.273559077 0.878426 0.273559077

(PAT+WMD)*PVF
98.5154603 79.44915908 65.1195822 54.12563412 45.51810956 38.64869481 33.07010056 28.46992817 24.62680133 21.38120296 -28.109632 6.838976917 467.654018 62.65401801

1 116 105.00 11.00 0 11.00 2 116 78.75 37.25 0 37.25 3 116 59.06 56.94 0 56.94 4 116 44.30 71.70 0 71.70 5 116 33.22 82.78 0 82.78 6 116 24.92 91.08 0 91.08 7 116 18.69 97.31 0 97.31 8 116 14.02 101.98 0 101.98 9 116 10.51 105.49 0 105.49 10 116 7.88 108.12 0 108.12 Working capital(1st Year) Salvage value of new machine/Old machine(10th Year) PV of Cash Inflows NPV IRR

19%

Calculation of Discounted rate

Calculating Ke(cost of equity) ke=(Do/P0) + g ke= 22/200 + 0.075 Ke=18.75% Calculation of Cost Of Debt Kd= .15(1-0.35)= 9.75 % WACC-weighted Average Cost of Capital Capital Structure Paid Up Capital Total Borrowings MV(in lakhs) 6000 7200 13200

Cost 0.1875 0.0975

MV*C/C 1125 702 1827

WACC= ( 1125+1827)/( 6000+7200) 0.14 Calculation Of Depriciation Calculation of Incremental Depreciation Old Project New Project Book Dep Cl Bal Value Dep 7.5 22.5 450 112.5 5.63 16.88 337.50 84.38 4.22 12.66 253.13 63.28 3.16 9.49 189.84 47.46 2.37 7.12 142.38 35.60 1.78 5.34 106.79 26.70 1.33 4.00 80.09 20.02 1.00 3.00 60.07 15.02 0.75 2.25 45.05 11.26 0.56 1.69 33.79 8.45

Dep(WDV) Cl Bal 337.5 253.13 189.84 142.38 106.79 80.09 60.07 45.05 33.79 25.34

Year 1 2 3 4 5 6 7 8 9 10

Book Value 30 22.50 16.88 12.66 9.49 7.12 5.34 4.00 3.00 2.25

105 78.75 59.06 44.30 33.22 24.92 18.69 14.02 10.51 7.88