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Project of Managerial Finance

FAUJI FERTILIZER COMPANY LIMITED

Abdul Basit Tahir Reg. 6250-FMS/MBA/F13

Saad Ali khan Reg.6238-FMS/MBA/F13

Atif Azam Reg. 6240-FMS/MBA/F13

Asad Maqsood Reg. 6248-FMS/MBA/F13

Shah Faisal Reg. 6241-FMS/MBA/F13

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COMPANY PROFILE

Vision:
To be a leading national enterprise with global aspirations, effectively
pursuing multiple growth opportunities, maximizing returns to the
stakeholders, remaining socially and ethically responsible
Explanation:
In a nation of increasing population, there is substantial opportunity of
growth for FFC in the years to come. FFCs vision is to play a leading role in
the industrial and agricultural advancement of the Country pursuing new
growth opportunities offering the convenience of multiple products, brands
and channels within and beyond the territorial limits of Pakistan, to the
benefit of our customers and our shareholders, elevating our image as a
and ethical company that is watched and
socially responsible
emulated as a model of success.
Mission:
To provide our customers with premium quality products in a safe, reliable,
efficient and environmentally sound manner, deliver exceptional services
and customer support, maximizing returns to the shareholders through core
business and diversification, providing a dynamic and challenging
environment for our employees.
Explanation:
FFC is a market-focused, process centered organization delivering
successful performance through a strong focus on quality. Our mission is to
stand above the competition and provide our customers with premium
quality fertilizer products in a safe, reliable, efficient and environmentally
sound manner, deliver exceptional services and unparalleled customer
support, produce predictable earnings for our shareholders, and provide a
dynamic and challenging environment for our employees.

Corporate Strategy:
Maintaining our competitive position in the core business, we employ our
brand name, unique organizational culture, professional excellence and
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financial strength diversifying in local and multinational environments

through acquisitions and new projects thus achieving synergy towards value
creation for our stakeholders.

Company Ownership:
The company is a public company incorporated in Pakistan under the
companies Ordinance, 1984, and its shares are quoted on the stock
exchange in Pakistan. FFC was established in 1978 as a joint venture of Fauji
Foundation and Haldor Topsoe. The first urea complex was commissioned in
1982. Plant-1 was improved in 1992, and a second plant was built in 1993. In
the year 2002, FFC acquired ex Pak Saudi Fertilizers Limited (PSFL) Urea
Plant situated at Mirpur Mathelo, District Ghotki from National Fertilizer
Corporation (NFC) through a privatization process of the Government of
Pakistan. This acquisition at Rs. 8,151 million represents one of the largest
industrial sector transactions in Pakistan. Fauji Fertilizer Bin Qasim Limited,
Karachi, Pakistan (FFBL) is another company where FFC has controlling
shares it produces 1670 MTPD of granular urea plus 2250 MTPD DAP after
revamping (1350 MTPD before revamp) DAP. Ammonia and urea plants
capacity factors right from the plants start-up have been 100% or more. With
a vision to acquire self - sufficiency in fertilizer production in the country, FFC
was incorporated in 1978 as a private limited company. This was a joint
venture between Fauji Foundation and Haldor Topsoe A/S.The initial share
capital of the company was 813.9 Million Rupees. The present share capital
of the company stands above Rs. 8.48 Billion. Additionally, FFC has more
than Rs. 8.3 Billion as long term investments which include stakes in the
subsidiaries FFBL, FFCEL and associate FCCL.
FFC participated as a major shareholder in a new DAPS/Urea
manufacturing complex with participation of major international/national
institutions. The new company Fauji Fertilizer Bin Qasim Limited (formerly
FFC-Jordan Fertilizer Company Limited) commenced commercial production
with effect from January 01, 2000. The facility is designed with an annual
capacity of 551,000 metric tons of urea and 445,500 metric tons of DAP,
revamped to 670,000 metric tons of DAP.
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Product and Service Description:

1) Urea (Nitrogen) Fertilizer:

In grain and cotton crops, at the time of last cultivation before

planting. In irrigated crops, urea can be applied dry to the soil. During
summer, often spread just before or during rain to minimize losses from
vitalization process.
Industrial: Raw material in manufacture of plastics, adhesives and industrial
feedstock.
Percentage of use in Pakistan: 80%,

Percentage of FFC Sales: 93%

2) DAP (Phosphate) Fertilizer:

Sona DAP is the most concentrated phosphatic fertilizer containing 46%

P2O5 and
18% Nitrogen. From nutrients' concentration point of view, it has got the
highest quantity of total nutrients in a 50 KG bag i.e. 32 KG of nutrients /
bag. The highest concentration of plant nutrients in a bag helps saving costs
of transportation, handling, storage and application. It is the widely used
phosphatic fertilizer in the world as well as Pakistan. The solubility of DAP is
more than 95%, which is highest among the phosphatic fertilizers available
in the country. Due to high solubility it can also be used through fertigation
as well as by foliar application. Its nitrogen to phosphoris ratio (1: 2.5) makes
it an ideal fertilizer for Basal application to meet the initial requirement of
most of the crops. Having an ultimate acidic effect on the soil, it is well
suited for our alkaline soils.
Industrial: It is a fire retardant and is used in commercial firefighting
products. Other uses are as metal finisher, yeast nutrient, nicotine enhancer
in cigarettes and sugar purifier.
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Percentage of use in Pakistan: 19%,

Percentage of FFC Sales: 6%

3) SOP (Potash) Fertilizer:

This fertilizer is an important source of Potash, which is a quality nutrient for
production of crops especially fruits and vegetables. Potash is an important
nutrient for activation of enzymes in the plant body and helps increasing
sugar and starch contents. Potash improves the resistance of the plants
against pests, diseases and stresses like water / frost injury etc.

Industrial: Occasionally used in manufacture of glass.

Percentage of use in Pakistan: 1%,
Percentage of FFC Sales: 1%

4) SONA BORON:
Sona Boron is a crystalline fertilizer in the form of Sodium Tetra Borate Deca
hydrate in 3 Kg packing. It is an essential micronutrient required for plant
nutrition, which pays a vital role in a number of growth processes especially
new cell development, pollination, fruit/seed setting, translocation of sugars,
starches, nitrogen and phosphorous, nodule formation in legumes and
regulation of carbohydrate metabolism. Boron deficiency results in curled
leaves, cracking and rotting of fruits, tubers or roots. Keeping in view
increasing boron deficiency in Pakistani soils FFCL is providing superior
quality Sona Boron containing 11.3% Boron (Borax). It is easily soluble in
water and readily available to plants. It can be used as mixture with other
fertilizers.

Capital Budgeting: Cash Flow Estimation:

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The Capital Budgeting:

Capital budgeting is the process of evaluating and selecting long-term

investments that are consistent with the firms goal of maximizing owners
wealth. Firms typically make a variety of long-term investments, but the
most common is in fixed assets, which include property (land), plant, and
equipment.
Capital budgeting process and the techniques financial managers use for
evaluating and selecting long term investments. To evaluate investment
opportunities, financial managers must determine the relevant cash flows
associated with the project. These are the incremental cash outflows
(investment) and inflows (return).

Incremental cash flows represent the additional cash flows outflows or

inflows expected to result from a proposed capital expenditure. Cash flows
directly affect the firms ability to pay bills and purchase assets.

Purpose for Capital Expenditure:

A capital expenditure is an outlay of funds by the firm that is expected to

produce benefits over a period of time greater than 1 year. An operating
expenditure is an outlay resulting in benefit received within 1 year. Fixed-
asset outlays are capital expenditure, but not all capital expenditures are
classified as fixed assets.

Capital expenditures are made for many reasons. The basic motives for
capital expenditures are to expand, replace, or renew fixed assets or to
obtain some other, less tangible benefits over a long period.

Major Cash Flow Components:

(1) Initial investment,

(2) Operating cash inflows
(3) Terminal cash flow
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Initial investment:
Initial investment refers to the relevant cash outflows to be considered when
evaluating a prospective capital expenditure. Our discussion of capital
budgeting will focus on projects with initial investments that occur at time
zero, the time at which the expenditure is made.

The cash flows that must be considered when determining the initial
investment associated with a capital expenditure are the installed cost of the
new asset, the after-tax proceeds (if any) from the sale of an old asset, and
the change (if any) in networking capital.

Operating Cash Inflows:

The incremental after-tax cash inflows, resulting from implementation of a
project during its life. All benefits expected from a proposed project must be
measured on a cash flow basis. Cash inflows represent dollars that can be
spent, not merely accounting profits.

Benefits expected to result from proposed capital expenditures must be

measured on an after tax-basis, because the firm will not have the use of any
benefits until it has satisfied the governments tax claims. These claims
depend on the firms taxable income, so deducting taxes before making
comparisons between proposed investments is necessary for consistency
when evaluating capital expenditures.

Terminal Cash Flow:

Terminal cash flow is the cash flow resulting from termination and liquidation
of a project at the end of its economic life. It represents the after-tax cash
flow, exclusive of operating cash inflows, that occurs in the final year of the
project. When it applies, this flow can significantly affect the capital
expenditure decision.

Capital Budgeting: Cash Flow Estimation

Fauji Fertilizer Company Limited is considering purchase of new organic
fertilizer machine The new unit can be purchased at 20,000,000 and requires
6,500,000 installation cost, it has a 5-year usable life and would be
depreciated by using a five year recovery period.. The new unit would be
sold out to net 15,000,000, after removal and cleanup cost and before taxes.
The Firm is subject to a 35% tax rate. We have raised three questions which
are answered in this section. We will calculate initial investment we shall find
out the operating cash inflows associated with the proposed asset
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replacement. The initial investment and operating cash inflows are given
below.

Initial Investment:

Installed Cost Of New Asset

Cost of New Asset
20,000,000
Installation Cost 6,500,000
Total Installed Cost
26,500,
000
After tax sales proceeds from old
asset:
Net sales proceeds from old asset
Tax
Total After Tax Sales Proceeds
Net working capital
Initial Investment
26,500,
000
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Cash flow of machinery:

Years 1 2 3 4 5 6
Revenue 30000000 30000000 50000000 50050000 65000000 72000000
expense 12000000 12000000 1350000 1000000 987000 967000
Income
before
18000000 18000000 48650000 49050000 64013000 71033000
depreciation
and tax
Depreciation 5300000 8480000 5035000 3180000 3180000 1325000

Income
12700000 9520000 43615000 45870000 60833000 69708000
before tax

tax @ 35% 4445000 3332000 15265250 16054500 21291550 24397800

Net income 8255000 6188000 28349750 29815500 39541450 45310200

add
depreciation 5300000 8480000 5035000 3180000 3180000 1325000
expense
Cash flow 13555000 14668000 33384750 32995500 42721450 46635200

Terminal Cash Flow

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After tax sale proceeds from the

machine Rs.
Proceeds from sale of the 15,000,
machine 000
Tax on sale of machine (15,000,000* 525000
Less 35%) 0

Change in
Add networking capital 0

Terminal 9750,0
Cash flows 00

Capital Budgeting Techniques:

KEY DEFINATIONS:

Capital Budgeting:
Capital budgeting, which is also called "investment appraisal,"
is the planning process used to determine which of an organization's long
term investments such as new machinery, replacement machinery, new
plants, new products, and research development projects are worth pursuing.
It is to budget for major capital investments or expenditures.

Cost of Capital:

The firm's Cost of Capital is the discount rate which should be used in Capital
Budgeting. The Cost of Capital reflects the firm's cost of obtaining capital to
invest in long term assets. Thus it reflects a weighted average of the firm's
cost of debt, cost of preferred stock, and cost of common stock.
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Net Present Value:

Net present value (NPV) is used to estimate each potential

project's value by using a discounted cash flow (DCF) valuation. This
valuation requires estimating the size and timing of all the incremental cash
flows from the project. The NPV is greatly affected by the discount rate, so
selecting the proper ratesometimes called the hurdle rateis critical to
making the right decision.

Internal Rate of Return:

The internal rate of return (IRR) is defined as the discount rate that gives a
net present value (NPV) of zero. It is a commonly used measure of
investment efficiency.
The IRR method will result in the same decision as the NPV method for non-
mutually exclusive projects in an unconstrained environment, in the usual
cases where a negative cash flow occurs at the start of the project, followed
by all positive cash flows. Nevertheless, for mutually exclusive projects, the
decision rule of taking the project with the highest IRR, which is often used,
may select a project with a lower NPV.

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.
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.

Profitability Index:

Profitability index (PI), also known as profit investment ratio (PIR) and value
investment ratio (VIR), is the ratio of payoff to investment of a proposed
project. It is a useful tool for ranking projects, because it allows you to
quantify the amount of value created per unit of investment.
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Net Present Value

If Means Then
NPV > The investment The project may be accepted.
0 would add value
to the firm.
NPV < 0 The investment The project should be
rejected. would subtract value from the
firm.

NPV = The investment We should be indifferent in the decision whether to

0 would neither accept or reject the project. This project adds no
gains nor loss monetary value. Decision should be based on other
value for the criteria, e.g. strategic positioning or other factors
firm. not explicitly included in the calculation.
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Year
1 2 3 4 5 6
Cash 4663520
13555000 14668000 33384750 32995500 42721450
flow 0
Discount 0.90909090 0.8264462 0.751314 0.6830134 0.620921 0.564473
factor 9 81 801 55 323 93
PV of
Cash 12322727.2 12122314. 25082456 22536370. 26526659 2632435
Flow 7 05 .8 47 .26 4.62

Total of all PV of Cash 124914882

flows
Less: Initial investment 26,500,000
NPV 98414882
The NPV of this project is in positive so we should accept
the project.

Year 0 1 2 3 4 5 6
-
26,500, 135550 146680 333847 329955 427214 466352
Cash Flows 000 00 00 50 00 50 00
Cumulative 135550 282230 616077 946032 137324 183959
cash Flows 00 00 50 50 700 900
Pay Back Period:

The payback period is 1.83 year.

Profitability index:
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Profitability index = Cash Inflow/ Cash Outflow

Profitability index= 183959900/26500000

Profitability index=6.94