CONTENTS

LIST OF FIGURES .............................................................................................................. 2 LIST OF TABLES ................................................................................................................ 3 LIST OF SYMBOLS ............................................................................................................ 4 1. 2. EXCECUTIVE SUMMARY ......................................................................................... 5 INTRODUCTION ......................................................................................................... 6 2.1 2.2 2.3 3. 4. 5. 6. 7. 8. BACKGROUND .................................................................................................... 6 JACKET MANUFACTURING PROCESS ............................................................. 7 ABOUT OUR PRODUCT (JACKET) AND COMPANY ....................................... 8

PROBLEM STATEMENT .......................................................................................... 11 OBJECTIVES .............................................................................................................. 12 LITERATURE REVIEW ............................................................................................. 13 METHODOLOGY ...................................................................................................... 18 FINDINGS AND DISCUSSION ................................................................................. 19 CONCLUSION AND RECOMMENDATIONS .......................................................... 29

REFERENCES ................................................................................................................... 30 APPENDIX A ..................................................................................................................... 31 APPENDIX B ..................................................................................................................... 33

LIST OF FIGURES

FIG 2.1 7.1 7.2 7.3 7.4 7.5

TITLE Flow chart indicating manufacturing process Estimated Net Cash Flow Diagram(A1) Estimated Net Cash Flow Diagram(A2) Annual Equivalent Cash Flow Diagram(A1) Annual Equivalent Cash Flow Diagram(A2) NPV vs Interest Rate diagram for both alternatives

PAGE 7 24 24 26 26 27

LIST OF TABLES

TABLE 7.1 7.2 7.3.1 7.3.2 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11

TITLE Project Capital Costs Estimated Annual Operating Costs Net Income Calculation for A1 Net Income Calculation for A2 Depreciation Calculation for Generator Depreciation Calculation for Sewing Machine Depreciation Calculation for Lamination machine Estimated Year End and Cash Flow Discounted Payback Period Calculation for A1 Discounted Payback Period Calculation for A2 IRR Calculation Comparison between two alternatives

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LIST OF SYMBOLS

A1 A2 MARR AE IRR FW NPV

: : : : : : :

alternative 1 (lamination done at external) alternative 2 (lamination machine bought) Minimum Attractive Rate of Return Annual Equivalent Internal Rate of Return Future Worth Net Present Value

1. EXCECUTIVE SUMMARY

This study provides an assessment of the feasibility of establishment of a jacket factory at Thankot, Kathmandu. It was established that there is a shortage of good quality , reasonably priced jackets in the markets in Pokhara and Kathmandu. While the sale of the jackets is almost nil in the summer season, the sale increases greatly in the winter season creating a shortage of jackets. There are several small scale jacket manufacturing companies in Nepal. However, due to their small level of investment and inadequate technical know-how, they arent able to meet the demands of the customers. Thus it was established that there is a lot of potential in this area and hence the establishment of a jacket factory could be beneficial. This study provides the economic feasibility of establishment of such type of factory. This assessment considered two alternatives for the production of jackets : With outsourcing of lamination job ALTERNATIVE 1 (A1) With own lamination machine ALTERNATIVE 2 (A2) These alternatives were chosen for assessment because market research on manufacture of different types of jackets showed that a lot of the small scale jacket manufacturing companies almost exclusively used external source for lamination for their jackets. (Lamination is done to make jacket water proof.) The primary reason for this as indicated by the market research was that a single lamination machine costs around Rs. 5,00,000 , which is a lot for these companies as an initial investment as there is already a significant amount to be spent on sewing machines and furniture among others. This assessment was carried out using the fundamental tools of project evaluation like Payback Period , NPV, IRR, FW and AE methods. The results of the study indicated a payback period of 3 year 30 days for the first alternative and 5 years 11 days for the second. Similarly, the internal rate of return of A1 was found to be 42% while that of A2 was found to be 30%. The values of NPV for A1 and A2 were found to be Rs.7,171,674.19 and Rs.4,914,097.73 respectively. As indicated by the above values, any of the above alternatives is feasible. However, the first alternative is more feasible than the second alternative.

2. INTRODUCTION

2.1 BACKGROUND

The development of a country depends upon the establishment of industries. Present age is an industrial age. Industrial development is the backbone of a countrys economy. Industries promote national economy and uplift the living standard of the people. The industrial revolution in context of Nepal started with small and cottage industries utilizing the local product but with relatively very low yields. So the need of medium and large scale industries was realized by everyone. Very few places of country have adequate infrastructures of medium and large scale industry. Government has separated some of such place as Industrial Estate since 2016. Presently, the condition of industries in Nepal is in poor condition. Many factories and industries have been shut down and many are in the verge of the same consequence due to the scarcity of basic infrastructures of electricity, water etc and political instability. This is adversely affecting the economy of the nation. There is a need for establishment of small scale companies which are economically feasible in Nepal. Market study in course of this project has shown that the demand for jackets in Nepal has been accomplished by foreign products which are relatively expensive than those manufactured in Nepal. It has also been seen that the existing jacket manufacturing companies are finding good position in the market as their products are cheaper, durable and of similar quality to that of foreign companies. The demand for jackets in the winter season grows exponentially and it is difficult to meet the demand. Hence, theres a market for new jacket manufacturing companies. Thus, there is high chance for other new jacket manufacturing companies to flourish in Nepal if they are established with proper study and research. This report provides the feasibility study of establishment of a jacket manufacturing company in Nepal. The field visit was done to get idea about general jacket manufacturing processes. It has been found that the lamination of jacket (part of jacket manufacturing process) is not being done inside the factory at Asis Jacket Manufacturing (factory where we visited). This report also compares the economic feasibility of owning the lamination machine within the factory and having the lamination done outside. The study is carried out using several project evaluation techniques like net present value, net future value, annual equivalent worth, internal rate of return, minimum attractive rates of return and discounted payback period. Accordingly, the feasibility of the establishment of company is looked over. The study is based on the current market values and data obtained from the existing jacket manufacturing company with few assumed data.

2.2 JACKET MANUFACTURING PROCESS

Procurement of raw materials (raw clothes, zipper, thread, button, lock, etc.)

Measurement of clothes for each piece of jacket is carried out.

Cutting of cloth for each piece of jacket

Logo is fixed in each jacket cloth piece

Stiching of cloth by automatic sewing machine giving the shape of jacket

Lamination of stitched jacket

Finishing of jacket

Packing of jacket in plastic bag

Fig. 2.1 Flow chart indicating manufacturing process

The flowchart of the jacket manufacturing process is briefly discussed below: At the initial stage, the raw materials required for manufacturing jacket are collected from the supplier. The raw materials are raw clothes, threads, buttons, locks, zippers, etc. which are imported from China. The dimensions of the cloth required to manufacture per piece of jacket is measured manually. The measured cloth to produce per piece of cloth is cut manually by scissor. Logo of the company is fixed in each piece of cloth. Stitching of each piece of cloth is done by automatic sewing machine. This gives the shape of jacket to cut cloth. Lamination of the jacket is done. Lamination is done to make the jacket water proof. Finishing of jacket where attachment of zipper, locks and button iscarried out. The overused threads are also trimmed in this phase. Finally the readymade jacket is packed in plastic bag and sent to whole-sellers and retailers.

2.3 ABOUT OUR PRODUCT (JACKET) AND COMPANY

OUR COMPANYS DESCRIPTION NAME: PASS JACKET FACTORY PROPOSED ESTABLISHMENT YEAR: 2014 TYPE: Partnership OWNERS: Arun Bikram Thapa, Pikam Pun, Sushan Nakarmi, Subash Dhakal

Machinery:

Our company will possess fifteen latest sewing machines and generator of 5KVA rating. Generator is needed for operation during the time of load shedding. It has been found that the generator of capacity 3KVA is capable of operating ten sewing machines. So generator of 5KVA is selected for operating 15 sewing machines. The total machinery cost in our company is NRs 1825000. The cost of generator of Kirlsosker brand of 5KVA in market is around NRs 500000 and that of sewing machine is around NRs 35,000.

The cost of lamination machine will be added in total machinery cost if lamination is to be done within the company. The cost of lamination machine is found to be around NRs 5, 00,000 in the market. Man power:

Our company will have fifteen employees operating fifteen sewing machines, one driver, one manager, one receptionist and one security guard. If lamination machines are used, two separate workers for the operation of the machines are also required. The total salary of the employees is about NRs 2160000per year. The detail calculation is given in annex. Location:

The companys location is selected at Thankot because of lower labour cost and lower rent. It is also because the companys major market target is Pokhara after Kathmandu. Furniture:

Four cutting tables are required for cutting raw clothes. The total cost of the furniture is kept around NRs 90,000. Raw materials and other utilities:

The raw clothes required to produce one jacket cost NRs 300. Our target is to produce around 2700 jackets per year during the first year. So the total cost of raw clothes per year is NRs 810000. Other materials like zipper, button, logo and locks cost around NRs 120 per jacket. Cost of scissors and tapes is taken around NRs 8,000. Target selling price:

The manufacturing cost of jacket is found to be NRs 1969.59(lamination done outside the company). Its calculation is shown in other part of the report. The selling price to whole seller will be NRs 2200. The selling price for the retailer can range from NRs 4,000 to NRs 5000. Vendor:

The raw materials required for manufacturing jacket is imported by several companies in Nepal from China. We can obtain these required materials from any of these appropriate companies. Miscellaneous:

Other materials and equipment required in building our company are kept under this topic. Computer, materials for building office, paper for documentation, billing papers, drinking water, etc. are kept under this heading. The total cost for these miscellaneous materials is taken NRs 50,000 (Generally) and 100000 in initial investment.

Product Description The color of our jacket will be of black, dark blue, sky blue, green and red. It is both wind and water proof. It will have two layers which can be used separately. The jacket will have two interior and two exterior pockets with zipper. The jacket can be used with either side as per the comfort and will be also provided with replaceable hook cap. The jacket is designed to take market majorly for winter season to kill cold.

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3. PROBLEM STATEMENT

After discussion, data collection and literature review, this study proceeded as a problem in engineering economics concerned with the establishment of a company as stated below: A group of four people are establishing a jacket manufacturing company by the name of PASS Jacket Factory at Thankot, Kathmandu with a view of catering to the needs of the people in Kathmandu and Pokhara. There are two options for investment. The first option, A1, has a total investment of Rs. 3112200 and the second option, A2, which includes the procurement of two lamination machines along with the other fixed asset purchases made in option A1 requires an investment of Rs. 4112200. Following are some of the details related to the projects: Rent: 3,00,000 per year Average sales per year: 2700 Wholesale Selling Price per jacket: Rs. 2200 No. of sewing machines: 15 No. of lamination machines (for A2) : 2

Generator use Capacity: 5kVA Winter: 6 months full use Summer: 6 months 40% of the time

Making certain valid assumptions, perform a feasibility study of the factory using different project evaluation techniques learnt in engineering economics.

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4. OBJECTIVES

MAIN OBJECTIVE To study the feasibility of establishment of a jacket manufacturing factory in Kathmandu

SPECIFIC OBJECTIVE To be familiarized with different Project Evaluation Techniques. To calculate the Net Present Value of the project. To calculate the Net Future Value of the project. To calculate the Annual Equivalent Value of the project To calculate the Mean Payback Period of the project To estimate the Cash Inflows and Cash Outflows of the project To calculate the MARR and IRR values of the project To learn the various decision making technique related in practical life To familiarize with the different step of establishing a manufacturing company in real world.

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5.

LITERATURE REVIEW

Project evaluation techniques: The main reason of opting project evaluation techniques in economic analysis is to enhance the decision making processes so that we can finalize the feasibility of project. Projects can be evaluated with the following techniques: 1. 2. 3. 4. 5. 6. 7. Payback period Discounted payback period Net present value method Net future value method Capitalized equivalent method Annual equivalent worth method IRR method

4.1 Payback period: Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment. The time value of money is not taken into account. Payback period intuitively measures how long something takes to "pay for itself." All else being equal, shorter payback periods are preferable to longer payback periods. Payback period is widely used because of its ease of use despite recognized limitations. (i.e. It doesnt consider the time value of money, so we use discounted payback period method generally.) Payback period= (initial investment)/ (annual income) 4.2 Net present value: In finance, the net present value (NPV) or net present worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows. In the case when all future cash flows are incoming and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise longterm projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met.
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The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputting a price; the converse process in DCF analysis, taking as input a sequence of cash flows and a price and inferring as output a discount rate (the discount rate which would yield the given price as NPV) is called the yield, and is more widely used in bond trading.

NPV in decision making NPV is an indicator of how much value an investment or project adds to the firm. With a particular project, if Rt is a positive value, the project is in the status of discounted cash inflow in the time of t. If Rt is a negative value, the project is in the status of discounted cash outflow in the time of t. Appropriately risked projects with a positive NPV could be accepted. This does not necessarily mean that they should be undertaken since NPV at the cost of capital may not account for opportunity cost, i.e. comparison with other available investments. In financial theory, if there is a choice between two mutually exclusive alternatives, the one yielding the higher NPV should be selected.

If... NPV > 0

It means...

Then...

the investment the project may be accepted would add

value to the firm NPV < 0 the investment the project should be rejected would subtract value from the firm NPV = 0 the investment We should be indifferent in the decision whether to would neither accept or reject the project. This project adds no gain nor lose monetary value. Decision should be based on other value for the criteria, e.g. strategic positioning or other factors not firm explicitly included in the calculation.

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4.3 Net future value: The NPV measures the surplus in an investment project at time 0'. Sometimes we might need to find the equivalent worth or value of a project at the end of the investment period. Hence, the Net Future Value (NFV) measures the surplus at the end of the investment period. The decision criterion is similar to the net present value analysis. NFV Criterion NFV = A0(1+i)n + A1(1+i)n-1 + A2/(1+i) n-2 + +An NFV =sum of An (F/A, i,N-n) 4.4 Annual equivalent method: The annual equivalent value (AE) criterion is a basis for measuring investment value by determining equal payments on an annual basis. First, we have to find the NPV of the project and then convert it to equal annual payments. AE (i) =PV(i)(A/P,i,n) If AE>0, accept the project If AE =0, remain indifferent If AE <0, reject the project

Benefits of annual equivalent method: Consistency of report format Need for unit cost Comparing unequal project lives

MARR: MARR = (Re*E)/I+(Rd(1-T)*D)/I Where, Re=rate of interest on equity Rd=rate of interest on debt E=total equity D=debt I=D+E= total investment T = rate of tax MARR: minimum attractive rate of return.
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IRR: IRR is the interest rate earned on the unrecovered project balance of investment such that, when the project terminates, the unrecovered project balance will be zero. NPV = A0/(1+i*)0 + A1/(1+i*)1 + A2/(1+i*)2 .+ An/(1+i*)n =0

DEPRECIATION: An organization must deal with and account for the fixed asset loses their value- even as they continue to function and contribute to the engineering projects that use them. The loss of value is called depreciation. It can involve deterioration and obsolescence. Three different methods can be used to calculate the periodic depreciation allowances. Two of the most widely used ones are described below: 1. The straight line method The straight line method of depreciation interprets a fixed asset as an asset that offers its service in a uniform fashion. The asset provides an equal fraction of the net cost of each year of its useful life. Dn=(I-S)/N P=cost of asset, including installation expenses S=salvage value N=useful life Dn=Depreciation charged during year n The book value = cost base - total depreciation charges Bn = P- (D1 + D2 +. + Dn)

2. Accelerated Method In this method, a fixed fraction of the initial book balance is deducted each year. The fraction or declining balance rate is obtained by d = 1/N The most common multiplier is '1'. If this is '2', then it is called double-declining balance method.
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D1 =dP D2 =d (P - D1) = dP (1-d) D3 =d (P - D1- D2) =dP (1-d) 2 For 'n' year, Dn = dP (1-d) n-1

We can also compute the total DB depreciation at the end of 'n' years TDB = D1 + D2 + D3 + D4 + .. + Dn = dP +dP (1 -d) +dP (1-d) 2+ . + (1-d) n-1 TDB = P [1-(1-d) n]

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6. METHODOLOGY

a.

Discussion

After a brief discussion, we decided to conduct a feasibility study of a jacket factory based on the data acquired from local jacket manufacturing factories. b. Market Research

After the decision to conduct the study , we conducted market research to inquire about various aspects of jacket creation. We consulted the owner of the Ashis Jacket Factory(AJF) located in Dallu, Mr. AshisSundas to ascertain information on the production methodology, investment, costs, etc. during the development of the jackets. c. Data collection

The next process in the study was to collect necessary data required to carry out the study. We collected data from various internet sources as well as from AJF. We also visited jacket retail shops in Bhotahity-Jamal area to obtain information on the costs and demand of different types of jackets. d. Literature Review

Since the primary purpose of this study is to carry out a feasibility study, we started looking for literature to learn about the ways to carry it out. We went through different articles as well as examples of feasibility studies which are mentioned in the References section. e. Calculation

In the next step of the study, different calculations were carried out based on the data collected to find out the operational costs, depreciation, payback period, IRR, MARR , FW, NPV, etc. of projects A1 and A2. f. Data interpretation

The results of the calculation were then tabulated and represented by different charts for easy interpretation of data as well as to show the relationship between various parameters of the study. g. Documentation

The final step of the study was documentation which was done by preparing a detailed report of the study.

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7. FINDINGS AND DISCUSSION

This study is carried out after a short market research and interaction with the owner of a profitable jacket factory. Certain valid assumptions were made for the study which is given below: The interest will be paid to the bank per year while the principle amount will be repaid at the end of project period.

The generator will be in use 40 percent of the time during the summer season while it will run non-stop during the working period in the winter season.

Annual expense is assumed to increase at the rate of inflation, which is 8.37%. (TRADING ECONOMICS, 2013)

Total sale increases at the rate of 13%. (with respect to increase in sales of ASIS JACKET FACTORY, Pg 36)

The life of the all the machines and equipment is around 10 years.

15 sewing machines will be used. Based on the above assumptions, the calculations of costs, investments, income and all the project evaluation tools are carried out.

Capital Costs The total investment of the project is around 31 lakhs without lamination machine and 41 lakhs with lamination machine. 40% of the capital is raised from the owners as equity and 60% is borrowed from bank as loan. Payment of Bank Loan Interest on the bank loan will be paid at 13% annually with the principle amount to be paid at the end of the project period

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Table7.1: Project Capital Costs Particulars Sewing Machines Generator Furniture-Cutting Tables Scissors and Measuring Tape Lamination Machine Registration*** Deposit Transportation van** Computer* Miscellaneous Total A1 525000 500000 90000 8000 0 35200 4000 1800000 50000 100000 3112200 A2 525000 500000 90000 8000 1000000 35200 4000 1800000 50000 100000 4112200

For any project initial investment is needed. In our project, the initial investments for the two alternatives are as mentioned above. The detail calculations are kept in annex. The total initial investment for Project A1 is NRs 3112200 & for A2 is NRs 4112200. The miscellaneous part includes stationery expenses as well as other overheads. *(HAMROBAZAR, 2013) **Sipradi Traders, Thapathali ***(NeupaneLegal, 2012)

Table7.2: Estimated Annual Operating Costs Particulars Rent Labour Administration Clothes Inventory handling Zipppers and Lamination Electricity Generator Running Lubrication Maintenance Transportation cost Threads Packing cost Miscellaneous Total A1 300000 2160000 384000 810000 84000 810000 10000 159667 90000 90000 194600 162000 13500 50000 5317767 A2 300000 2448000 384000 810000 100000 660000 14000 220000 104400 106800 194600 162000 13500 50000 5567300
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The operating cost plays a vital role in any project. The annual operating costs of our project are as shown above. The major part of annual operating cost is contributed by Labor cost. Other operating costs include cost of raw material and Administrative expenses. The annual revenue of our project (for first year) is NRs 5940000 which is more than annual operating cost of both projects A1 & A2. Details of sales and revenue are included in following tables. Income Table7.3.1: Net Income Calculation for A1 BANK S.N EXPENSE SALES INTEREST 1 5317767 2700 242752 2 5762864 3057 242752 3 6245216 3461 242752 4 6767940 3918 242752 5 7334417 4435 242752 6 7948308 5021 242752 7 8613581 5685 242752 8 9334538 6436 242752 9 10115839 7286 242752 10 10962534 8249 242752 Table 7.3.2: Net Income Calculation for A2 BANK INCOME NET S.N EXPENSE SALES INTEREST REVENUE BEFORE TAX TAX INCOME 5567300 2700 320752 5940000 51948 12987 38961 1 6033283 3057 320752 6724793 370759 92690 278069 2 6538269 3461 320752 7613274 754253 188563 565690 3 7085522 3918 320752 8619140 1212867 303217 909650 4 7678580 4435 320752 9757902 1758570 439642 1318927 5 8321277 5021 320752 11047116 2405088 601272 1803816 6 9017768 5685 320752 12506663 3168143 792036 2376107 7 9772555 6436 320752 14159044 4065737 1016434 3049303 8 10590518 7286 320752 16029738 5118468 1279617 3838851 9 11476945 8249 320752 18147589 6349892 1587473 4762419 10
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INCOME REVENUE BEFORE TAX 5940000 379481 6724793 719178 7613274 1125306 8619140 1608448 9757902 2180733 11047116 2856057 12506663 3650330 14159044 4581755 16029738 5671148 18147589 6942303

TAX 94870 179794 281327 402112 545183 714014 912582 1145439 1417787 1735576

NET INCOME 284611 539383 843980 1206336 1635550 2142043 2737747 3436316 4253361 5206727

The sale is expected to increase at the rate of 13% and the initial sales figure is expected to be 2700 which is taken on the basis of market research and data from ASIS JACKET FACTORY. The expected sales in 10 years time are 8249 which is within the capacity of our company. The interest of bank is paid annually with the rate of 13% without paying the part of principle amount which will be paid after 10 years time.

Depreciation Calculation: Depreciation is calculated by using double declining balance method. Generator: Table7.4: Depreciation Calculation for Generator Year n 1 2 3 4 5 6 7 8 9 10 Bn-1 120000 96000 76800 61440 49152 39322 31457 25166 20133 16106 Dn 24000 19200 15360 12288 9830 7864 6291 5033 4027 3221 Bn 96000 76800 61440 49152 39322 31457 25166 20133 16106 12885

Sewing Machines: Table7.5: Depreciation Calculation for Sewing Machines Year n 1 2 3 4 5 6 7 8 9 10 Bn-1 525000 420000 336000 268800 215040 172032 137626 110100 88080 70464 Dn 105000 84000 67200 53760 43008 34406 27525 22020 17616 14093 Bn 420000 336000 268800 215040 172032 137626 110100 88080 70464 56371
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Lamination Machines: Table7.6: Depreciation Calculation for Lamination machine Year n 1 2 3 4 5 6 7 8 9 10 Bn-1 1000000 800000 640000 512000 409600 327680 262144 209715 167772 134218 Dn 200000 160000 128000 102400 81920 65536 52429 41943 33554 26844 Bn 800000 640000 512000 409600 327680 262144 209715 167772 134218 107374

The depreciation is calculated with double declining method because it is mostly used in different projects. The reason for using double-declining balance depreciation on the financial statements is to have a consistent combination of depreciation expense and repairs and maintenance expense during the life of the asset. The tables show the depreciation value for sewing machine, generator and lamination machine separately. Estimated Net Year End Cash Flow Table7.7: Estimated Year End Cash Flow Year N 0 1 2 3 4 5 6 7 8 9 10 WITHOUT(a1) -3112200.00 773611.05 930583.23 1156939.67 1456704.06 1835844.18 2302278.41 2865935.82 3538866.64 4335401.51 3667569.35 WITH(a2) -4112200.00 727961.30 829269.05 1006649.94 1262417.93 1601141.87 2029587.26 2556724.31 3193796.52 3954446.24 2757479.36

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Fig7.1: Estimated Net Cash Flow Diagram (A1)

Fig7.2: Estimated Net Cash Flow Diagram (A2) The cash flow diagram and table indicates the yearly flow of cash. The downward flow in the diagram shows the initial investment which is negative and the upward flow is net cash inflow which is almost constant for the first two years then starts to increase almost with a
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constant rate . Net flow decreases at the 10th year because of the payment of principle amount of the bank loan. Project Evaluation Bank Loan Interest (i) = 13% (Nepal Bank Limited under Commercial/Industrial Loan) Discounted Payback Period Calculation Table 7.8: Discounted Payback Period Calculation for A1 Cost of Ending Cash Cash flow funds(@Marr=13%) Balance (3112200.00) (3112200.00) 773611.05 (404586.00) (2743174.95) 930583.23 (356612.74) (2169204.46) 1156939.67 (281996.58) (1294261.37) 1456704.06 (168253.98) (5811.29) 1835844.18 (755.47) 1829277.42 2302278.41 237806.06 4369361.90 2865935.82 568017.05 7803314.77 3538866.64 1014430.92 12356612.33 4335401.51 1606359.60 18298373.44 3667569.35 2378788.55 24344731.33

Period (n) 0 1 2 3 4 5 6 7 8 9 10

Table 7.9: Discounted Payback Period Calculation for A2 Period (n) 0 1 2 3 4 5 6 7 8 9 10 Cost of Ending Cash Cash flow funds(@marr=13%) Balance (4112200.00) (4112200.00) 727961.30 (534586.00) (3918824.70) 829269.05 (509447.21) (3599002.86) 1006649.94 (467870.37) (3060223.29) 1262417.93 (397829.03) (2195634.40) 1601141.87 (285432.47) (879925.00) 2029587.26 (114390.25) 1035272.01 2556724.31 134585.36 3726581.69 3193796.52 484455.62 7404833.83 3954446.24 962628.40 12321908.46 2757479.36 1601848.10 16681235.92

One of the major disadvantages of simple payback period is that it ignores the time value of money. To counter this limitation, an alternative procedure called discounted payback period
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may be followed which accounts for time value of money by discounting the cash inflows of the project. The discounted payback period for option A1 is around 3 years and for A2 is around 5 years. Annual Equivalence Annual equivalence for alternative A1 =NRs. 1,321,740 Annual equivalence for alternative A2 =NRs. 905,668

Fig 7.3: Annual Equivalent Cash Flow Diagram (A1)

Fig 7.4: Annual Equivalent Cash Flow Diagram (A2)

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The annual equivalence for both cases is positive. So both the projects are feasible. The annual equivalence of A1 is greater than A2. Hence it is better to laminate jackets from secondary source than to buy lamination machines.

Internal Rate of Return Table 7.10: IRR Calculation I.R 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% IRR for A1= 42% IRR for A2= 30% Since IRR for both alternatives is greater than MARR, both alternatives are feasible. But, IRR of A1 is greater than A2 i.e. A1 has greater rate of return. A1 19,751,533.92 9,038,050.98 4,114,972.66 1,607,009.00 211,395.71 (626,255.48) (1,162,541.58) (1,525,232.08) (1,782,155.49) (1,971,408.40) (2,115,480.96) A2 15,807,273.77 6,535,453.35 2,252,896.68 62,285.51 (1,160,719.07) (1,896,725.64) (2,368,996.85) (2,689,030.22) (2,916,153.63) (3,083,750.03) (3,211,555.19)

Fig7.5: NPV vs Interest Rate diagram for both alternatives

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Table 7.11: Comparison between two alternatives Column1 NPV IRR FW AE per month income per sale income per owner per owner per year PROJECT A1 7,171,674.19 42% 24,344,965.20 1,321,739.55 110,144.96 440.58 27,536.24 330,434.89 PROJECT A2 4,914,097.73 30% 16,681,396.17 905,668.21 75,472.35 301.89 18,868.09 226,417.05

Net present Value, Future Worth and Annual Equivalent for both alternatives are positive. So, both projects are feasible. Since, the values of these are greater in A1, alternative A1 is more feasible.

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8. CONCLUSION AND RECOMMENDATIONS This assessment finds the establishment of the proposed jacket factory at Thankot, Kathmandu feasible with both the alternatives presented above. However, for this smallscale operation, it was found that the first alternative (lamination job done at another factory) is more feasible. The results of the study indicated a payback period of 3 year 30 days for the first alternative and 5 years 11 days for the second. Similarly, the internal rate of return of A1 was found to be 42% while that of A2 was found to be 30%. The values of NPV for A1 and A2 were found to be Rs.7, 171,674.19 and Rs.4, 914,097.73 respectively. As indicated by the above values, any of the above alternatives is feasible. However, the first alternative is more feasible than the second alternative. This assessment has been carried out with different assumptions as indicated in the assumptions section under findings and discussion. Some of the following points, presented here as recommendations, can help increase the profit and reduce costs: - Pursuit of potential grants and subsidies from the government - Continual study and market research for finding potential - Search for cheaper and more skillful workers - Purchase of used machinery at a cheaper price whenever possible.

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REFERENCES
ALIBABA. (2013). Multi Functions Laminating Machine. Retrieved 2013, from http://www.alibaba.com/productgs/539324453/SJFM_Z90_28_Muliti_Functions_Laminatin g.html?s=p BERC. (2011). A Feasibility Study of Pellet Manufacturing in Chitteden County , Vermont. Feasibility Report, Biomass Energy Research Center (BERC). BuyanHold. (2013). Retrieved 2013, from http://www.buyandhold.com/bh/en/education/oak/qa/qa44.html Deloitte. (2013). Economic Feasibility Study. Retrieved May 2013, from http://www.deloitte.com/view/en_IL/il/services/fas/economicfeasibilitystudy/index.htm Feasibility Study Expert . (2013). Feasibility Study : Examples and Samples. Retrieved 2013, from http://www.feasibilitystudyexpert.com/ HAMROBAZAR. (2013). Retrieved 2013, from http://hamrobazaar.com/index.php?catid=20 Kirloskar Generators. (2013). Kirloskar Generators. Retrieved 2013, from (http://www.nepalhomepage.com/equipments-and-supplies/generators-parts-salesrepair/kirloskar-generators-sterling-sales-co-pvt-ltd.html) NAKARMI SALES PVT LTD. (2013). SEWING MACHINES. Retrieved 2013, from http://www.aksbaje.com/Kathmandu/Sewing-Machines/Nakarmi-Sales-Pvt-Ltd NeupaneLegal. (2012, July 30). Retrieved june 5, 2013, from http://neupanelegal.blogspot.com/2012/07/company-registration-in-nepal-basics.html Park, C. S. (2012). Contemporary Engineering Economics (5th ed.). PHI Learning Private Limited. Sleeping Lion Associates. (2005). Slaughterhouse Feasibility Report. Feasibility Report. TAXRATES. (2013). NEPAL TAX RATES. Retrieved 2013, from http://www.taxrates.cc/html/nepal-taxrates.html TRADING ECONOMICS. (2013, June 5). Retrieved June 5, 2013, from http://www.tradingeconomics.com/nepal/inflation-cpi

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APPENDIX A

NEPAL BANK LIMITED LENDING RATES

www.nepalbank.com.np/interest/ Updated on Feb 27, 2013 Accessed on May 30, 2013

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APPENDIX B

CALCULATION OF ANNUAL EXPENSES AND COSTS

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CALCULATION OF MARR For Project A1 Rate of interest on equity (Re) Rate of interest on debt (Rd) Total debt (D) Total equity (E) Total investment (I) Rate of tax (T) MARR 18% 13% 1867320 1244880 3112200 25% 13.05% For Project A2 18% 13% 2467320 1644880 4112200 25% 13.05%

The value of MARR was rounded up to 13% and all the calculations are based on this value of MARR. The value of tax rate (TAXRATES, 2013) and the value of return on equity (BuyanHold, 2013) are taken from appropriate sources.

RENT Advance (NRs) Rent for office (NRs) Rent for working room (NRs) No of working rooms Rent per month (NRs) Rent per year (NRs)

200000 5000 10000 2 25000 300000

The rate of rent is determined on the basis of enquiry with the local people of Thankot. We require three rooms, one for office and two as working rooms. Working rooms will be used for inventory too.

LABOUR COST Out sourcing lamination machine No of labor Labor salary per month (NRs) Labor salary per year (NRs) Installing lamination machine No of labor Labor salary per month (NRs) Labor salary per year (NRs)

15 12000 2160000

17 12000 2448000

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The rate of payment as labor is based on the recent market trend. Each laborers will operate one sewing machine. Similarly two operators will operate the two lamination machines. ADMINISTRATIVE COST Manager salary per month (NRs) per year (NRs) Receptionist salary per month (NRs) per year (NRs) Security guard salary per month (NRs) per year (NRs) Total administrative cost per month (NRs) per year (NRs)

16000 192000

8000 96000

8000 120000

32000 384000

COST OF RAW CLOTHES Cost of raw cloth per meter (NRs) Raw cloth required to make a jacket in meter No of jacket to be produced per year Total cost for clothes per year (NRs) ZIPPER, LAMINATION AND OTHER COST Out sourcing lamination Cost of zipper, button, logo per jacket (NRs) cost of lamination per jacket (NRs) No of jackets Total cost per year (NRs) Installing lamination machine Cost of zipper, button, logo per jacket (NRs) No of jackets Total cost per year (NRs)

150 2 2700 810000

210 90 2700 810000

210 2700 567000

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The above calculation of cost for raw clothes and zipper, lamination and other cost is based on the data provided by ASIS JACKET FACTORY, located at Thamel, Kathmandu.

COST OF SEWING MACHINE Cost of automatic sewing machine (NRs) No of sewing machine Total cost of sewing machine

35000 15 525000

The cost price of automatic sewing machine is found from Nakarmi Sales Pvt. Ltd (NAKARMI SALES PVT LTD, 2013) COST OF CUTTING TABLE (FURNITURE) Cost of cutting table (NRs) No of cutting tables Total cost of cutting table (NRs)

22500 4 90000

Source of cost of cutting table is Nakhipot Furniture located at Nakhipot. COST OF SCISSORS AND TAPES Cost of scissor and tape (each) (NRs) No of scissors and tapes (each) Total cost of scissors and tapes PACKAGING COST Packaging cost per jacket (NRs) No of jackets Total cost of packaging per year(NRs)

200 20 8000

5 2700 13500

The cost of scissors and tapes is taken from a local stationery shop and packaging cost is taken from ASIS JACKET FACTORY. ANNUAL SALES DATA (ASIS JACKET FACTORY)
Year 1 2 3 4 5 6 7 8 Sales 800 1000 1300 1400 1700 1900 2000 2200 36

COST OF LAMINATION MACHINE Cost of lamination machine (NRs) No of lamination machine Total cost of lamination machine (NRs)

500000 2 1000000

The cost of lamination machine is obtained from the following source: (ALIBABA, 2013) COST OF GENERATOR (NRs) Cost of generator No of generators Total cost of generator

500000 1 500000

The cost of generator is obtained from Kirlosker Generator House located at Naxal. (Kirloskar Generators, 2013)

TRANSPORTATION COST Driver salary per month (NRs) Maintenance cost per month Road tax cost per year (NRs) Third party insurance cost per year (NRs) Mileage of vehicle Cost of diesel per litre (NRs) Distance traveled per month cost for diesel per month (NRs) Total transportation cost (NRs)

9000 2000 18000 5000 15 99 500 3300 194600

The road tax and third party insurance cost of vehicle are obtained from Yatayat Baybastha Bivagh.

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LUBRICATION COST PARTICULARS REMARKS Outsourcing lamination machine No of machine (sewing machine) 15 Cost of lubrication per month per sewing machine (NRs) 500 No of months 12 Total cost of lubrication per year (NRs) 90000 Installing lamination machine No of machine (sewing machine) Cost of lubrication per month per sewing machine (NRs) No of lamination machine Cost of lubrication per month per lamination machine (NRs) No of months Total cost of lubrication per year (NRs)

15 500 2 600 12 104400

The cost of lubrication per machine is taken from ASIS JACKET MANUFACTURER as well as from the supplier as mentioned above.

CALCULATION OF NO OF JACKETS PRODUCED IN A DAY BY ONE MACHINE TO MEET TARGET PRODUCTION

PARTICULARS No of jackets produced per year No of sewing machine available No of working days in a month (average) No of working months in a year No of jackets produced per day per machine

REMARKS 2700 15 24 11 0.682

Note: The actual capacity of the machine is higher as the machines are not operated at full potential throughout the year. We are working only for 11 months a year. 1 month is allocated for different festival vacations. Data obtained from ASIS JACKET FACTORY indicates that it takes about 2 hours to create 1 jacket.

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