Final Report

Yasir Mir 16110188Arif Hussain16110220Haroon Nasir16110221M. Asad Naeem16110263M. Nouman Ameen 16110209Ramish Hassan16110211M. Abdullah Afridi16110166

EXECUTIVE SUMMARYThe textile Industry is the largest industry of Pakistan, contributing about 9.5% to the GDP and providing employment to about 30% of the workforce of the country. Among the textile industry exports, the export of cotton denim fabrics has increased from 45 million square meters worth PKR 4.37 billion in 2005-06 to 229 million square meters worth PKR 20.49 billion in 2009-10, thus showing an average increase of 74% per annum in terms of value. Besides foreign demand, local market demand of denim jeans is also increasing day by day, creating investment and job opportunities in this sector. Fashion is today incomplete without denim. Denim comes in all forms, looks and washes to match with every dress. So we are taking initiative to setup a denim jeans manufacturing plant and the proposed location for our business will be Lahore. This sector is involved in the weaving of denim fabric into jeans which is used locally as well as exported to foreign countries. The process will include dyeing, pre- shrinkage of jeans, acid wash, Sandblasting or abrading with sandpaper, finishing and then quality control. The denim jeans sector consists of many large companies such as the Siddiqsons Denim Mills Limited, Pak Denim Limited, Ali Murtaza Associates (Pvt) Ltd.We are planning to form a Private Limited Company named Dhaaga Saaz- Denim Jeans (Pvt) Ltd, with sole proprietorship. The capital structure will comprise of both equity as well as debt financing, with the major portion being of debt capital. We have planned to raise finance from commercial banks, venture capitalists as well as government grants for new startups. Our initial expenditure will mainly comprise of the plant, machinery cost and land. We will use both primary and secondary research methods to find out the relevant data and information. The secondary data sources will include Pakistan Economic Surveys, reports of the State Bank of Pakistan, reports of Federal Bureau of Statistics, chambers of commerce as well as World Bank Reports on the growth in specific industries in Pakistan. These will be used to gain the basic insights relating to the industry in general and the business processes in particular. Apart from this, primary research methods will also be used to gain specific insights relating to the financial and operational feasibility of our business idea. These will include visits to jeans manufacturing plants currently operating in nearby areas, and other businesses operating in the textile sector such as cotton yarn suppliers and textile mills. The operations and performance of our business will be affected by many different factors. These include some macroeconomic variables such as the GDP growth rate of the economy, which will determine the change in aggregate demand in the economy and hence the demand for fashion apparels. Apart from this inflation rates will affect the raw material cost of our business and the increase in wage rates. Moreover, the trade policies of the government will also be an important factor, as much of the output of this sector is exported. The number of firms in the denim jeans manufacturing industry will also affect our business as it will determine the demand of our products i.e. denim jeans. Another factor which can affect our business can be increasing demand for other apparels i.e. bottom wears and athletic wears etc. Minimum wage rate from the government can also be an affecting factor. As we have a huge number of workers working in different departments so if government increases minimal wage rate then our cost may significantly increase reducing our marginal profits. INDUSTRY ANALYSISPakistan has always been strong in textile industry due to huge investments in this sector and abundance of cotton. In the last decade, weaving of denim fabrics had increased to a great extent. The export of cotton denim fabrics from Pakistan has increased from 45 million square meters worth PKR 4.37 billion in 2005-06 to 229 million square meters worth PKR 20.49 billion in 2009-10, thus showing an average increase of 74% per annum in terms of value. Other than foreign market local demand for denim jeans is also increasing day by day, creating investment and job opportunities in this sector. Almost all the leading manufacturers are mainly focusing on the export market where A-class product is demanded and exported, whereas B- class product is being sold in the local market. Manufacturers which are working primarily for domestic market are very few. Major known manufacturers are in Karachi and Lahore. Other important hubs are Sialkot, Faisalabad and Gujranwala. SWOT AnalysisStrengths Weaknesses>Low cost labor (usually piece rate system) >Less concentration on domestic market>Abundant raw material available (particularly Cotton) >Power and Gas shortages>Availability of low-cost machinery > lack of capital and finance to small >High market demand enterprises.> Huge Available work force > Low differentiation >Progressive increase in capacity (as units are small and > Lack of trained and skilled machinists and Can be installed when needed) technicians> Well-situated industrial estate with all major facilitiesavailable

Opportunities Threats > Local customers are willing to pay high prices for > As cost of energy is increasing day by day . high qualityso cost of manufacturing may increase >Export (accessibility in Global market) >New entrants can enter the market easily>Government subsidies in future >Political & social volatility in country>Research & Development potential (processes can be > International competition from India efficient) > Restrictive policies regarding exports >Build a brand >Increase in minimum wage of labor >Mass production (economies of scale)Porters Five Forces AnalysisPorter five forces analysis is a framework for industry analysis and business strategy development. This is useful, because it helps understand both the strength of current competitive position, and the strength of a position one is considering moving into. With a clear understanding of where power lies, we can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps. The following are the five forces that drive competition in an industry.1. Industry Rivalry (competitors)1. Availability of Close Substitutes1. Threats of New Entrants1. Bargaining Power of Suppliers1. Bargaining Power of Customers1. Industry RivalryMajor denim Jeans stitching units are located in the upper Punjab so building our unit here will increase competition. But domestic need-focused manufacturers are very few and are also in small size. Major manufacturers are primarily focusing on export market. This means that although there will be competitive rivalry in the industry, the competition from large producers will be less. As the product has less differentiation so marketing expenditure will be high and competitors will be spending comparatively. Hence, overall the competitive rivalry in this industry is lower than many other industries in Pakistan.2. Availability of Close substitutesDespite high consumer favor, jeans are losing a significant amount of retail floor space to other bottoms wear items like dresses and athletic pants. The popularity of womens dresses has increased in the past five years, while athletic wears presence at retail has grown, in recent years, due to its popularity as a multifunctional apparel item among men and women. The competition that denim jeans are facing from other substitutes is intensified because of changing trend. So, there is need to introduce new designs with high quality because other substitutes are eating up its sales. 3. Threat of New entrantsThis industry has somewhat in between of high and low barriers to entry. There are bright future prospects in this business because of high demand in local and foreign markets but cost of building up a unit is high which may restrict small investors to enter in this market. Also many government incentives exist in this industry such as tax exemptions on exporting cotton products. So overall, there is a threat of new entrants in the industry.4. Bargaining Power of Suppliers Like any manufacturing industry, we also face the power of supplier as we have to buy our raw materials viz. denim fabric etc. from them. Our tentative suppliers would be Sapphire Group, Nishat Spinning, Gulistan Textiles and the Bhanero Group. Our stand in this category is almost in safe position as we have more number of suppliers with no or very less switching costs associated with them as prices of our raw materials remain nearly constant in short term due to the easy availability and various number of suppliers in the market. However, there are many buyers of denim fabric in the market since the textile industry is very developed in this region of upper Punjab. So the suppliers will have some degree of bargaining power, but since the suppliers are also in a large number, this power will not be very significant. 5. Bargaining Power of Customers The presence of powerful buyers reduces the profit potential in an industry as they can affect prices. But in our industry, buyers have relatively low bargaining power and we enjoy relatively more power than our buyers as our products are bought in low volumes and there are many buyers in the market. Also there are many suppliers in the market too; so neither of us, company nor buyers, can affect prices. PESTLE AnalysisPESTLE is an industry analysis used to analyze the microenvironment within which a business operates. It includes an analysis of the major external forces which affect a business and its performance.Political: This refers to the ways in which government can intervene in terms of environmental and labor laws, tariffs, trade restriction and tax policies. The political situation in Pakistan is not satisfactory. There is an uncertainty in governments structure and we all know when a ruling party faces this sort of uncertainty they fail to do well for public. The policies regarding foreign exchange, imports, exports and investments have been consistently unpredictable due to political instability in the country. Instability in Gas and Electricity are adversely affecting the textile sector while government has hardly taken any steps to give some reliefs or incentives to the businessmen operating in this industry. It was also witnessed that due to prices increase in gas has not only adversely affected the productivity of the weaving industry but has also caused sudden increase in the production cost and has badly affected the economy of the country. Due to increase in production cost, denim jeans sector of Pakistan is facing challenges in operating in local and international market. Tight monetary policy is also creating a lot of hurdles for this sector and exporters. Also rapidly growing interest rates of the banks is causing small manufacturers to shut down their business. Sometimes government also fails to decrease every day trade deficit. In short, the constantly changing regulations and instability in the policies of the government can greatly hamper the overall apparel industry in achieving its optimum potential.

Technological: This refers to how technology can change and includes automation, Research and development and activity and technological incentives that are available. Technological can also have an impact on efficient production levels and influence decisions on outsourcing. In addition to this there are some changes in technology that can affect the costs that a business needs to meet and improve the quality of product or service that a business offers. Rapid changes in technology and development have increased the compaction. Pakistan is lagging in the technology. The machinery used by the industries in Pakistan is obsolete and outdated. The main reason for this is that he cost of replacing the obsolete machinery is quite high. Also nowadays lack of R&D results in the low quality of cotton as well as low profitability in cotton crops therefore farmers are shifting to other crops.EconomicThis refers to how exchange rates, inflation rates, interest rates and economic growth will impact a business and how it can grow, develop and make various decisions. From 1998-2008 inflation rate has increased almost 100%. With this much increase in inflation, investors are expecting high returns for the risk inherited in the system. After 2008, Government pulled back the incentives like R & D (research and development) and subsidies on utilities from the textile industry due to which this industry suffered a lot. The prices in weaving sector have also increased because of shortages of electricity, petroleum and gas. The labor in Pakistan is cheaper than that of foreign countries so there is a huge market for exported goods.The export of cotton denim fabrics from Pakistan has increased from 45 million square meters worth PKR 4.37 billion in 2005-06 to 229 million square meters worth PKR 20.49 billion in 2009-10, thus showing an average increase of 74% per annum in terms of value. This market has capability of increasing if provided with incentives and subsidies. Because of modernization and the improvement of the production base, textile industry has shown huge investments in the last five years. So, there is a chance of attracting foreign investors towards this industry which can enhance e the image of the industry in international markets and would help to boost of exports of Pakistan in Textile industry.LegalSmall manufacturers who are working primarily on domestic level are not facing strict legal bounds. However, reputed firms have to comply with the rules set by the government e.g. to protect rights of workers government has set this rule for wage that workers should be paid at least the minimum legal wage or the local industry standard, whichever is greater. Also the firms are required to get certification from ISO 9000 to ensure better quality. Also environmental agency has put restriction on it regarding the environment protection. Some foreign countries have released their tariffs on textile products increasing our chance of greater exports and in turn increasing GDP.SocialSome of the most important social factors related to the weaving industry of Pakistan are Child Labor, Low Wages unhealthy environment for workers. These factors have a significant effect on the quality and cost for the industry as well as some concerns relating to humanrights.Due to high rates of inflation in the country, it is costly for the textile industry to hire skilled labor. Therefore, to minimize the variable costs, it is taking more of unskilled child labor in the factory which is creating a lot of social and ethical concerns. The unskilled young labor has to give up the same effort as a skilled labor at work and most of the time has to work longer in order to eliminate the errors undergone in production, but he is compensated with a meager wage. At the same time, some of the skilled labor is employed at a minimal wage per hour to reduce costs further. EnvironmentalSimilarly, textile industry is also responsible for environmental pollution caused by the industrial waste. Majority of these concerns arise from the solid wastes and residues from the units. These wastes include yarn, fabrics, paper and wasted sludge. The cotton dust and fiber dust particulates from the dry processes of the machines and pollute the surrounding air. In addition to this, noise pollution created by the machinery is also a source of great environmental concern. The machines operate at very high speeds and the noise produces by it exceeds the allowed noise level. Therefore, it is pertinent to eliminate environmental pollution and if possible reduce the resource consumption as much as possible and finding a balance between production and a safe and clean environment for the population.ASSUMPTIONS OF THE MODELThere will be a constant inflation rate of 13% per year throughout the forecast period. This figure is based on the average inflation rate of the last 5 years in Pakistan. Sales Model1. The regression model is based on the sales volume and advertisement expenditure figures of Artistic Denim Mills which is a jeans manufacturer and similar in characteristics to our business. The other independent variable is the population figures of Pakistan for the last 10 years. Population is considered a demand driver based on the rationale that a higher population will lead to an increase in our target segment and hence increase the demand. Advertisement/promotion plays an important role in the apparel industry to boost sales; hence it is used as the second demand driver.1. The population projections for the forecast period are based on an average growth rate for the last 10 years i.e. 1.8%.1. The selling price per jeans will be Rs. 500, 570, 640, 720 and 810 respectively in the five years from 2014-2018.Production Schedule1. Closing inventory will be equal to 10% of next years expected sales.1. There will be a rejection margin of 3% in the production of jeans i.e. the production of jeans in each year will be 3% more than the sales expected to account for rejection of some units at the time of delivery.Procurement Schedule1. The Closing Inventory of raw material (Denim) will be 20,000 meters in each year, as a safety measure against a shortage of materials.1. 1.2 meters of denim is used to produce each pant. This amount allows for the wastage and shrinkage of cloth during processing.Cost Model1. All costs increase with the assumed inflation rate of 13%.1. Costs are calculated for each Process. Some Overheads are directly traceable to each process, so they are included as part of the process cost e.g. salaries of machine operators of the cutting process are traceable to the cutting process. Other Overheads are not traceable so they are added in the total manufacturing cost.Depreciation Calculation1. Equipment and Computer Systems are depreciated using the diminishing balance method, and their depreciation in the earlier years will be higher than the later ones because they will contribute more to the profit-generating potential of the business in the earlier years. In the later years their contribution will be less due to obsolescence. Their depreciation rates are 20 and 10 percent per year respectively.1. Transportation vehicle and Fixtures and Fittings are depreciated using straight line method and their depreciation along all years will be same. This is due to the reason that there is no obsolescence involved in the use of the vehicle or the fixtures, and their value will be decreased due to wear and tear, which will be more or less same across the years. They will both be depreciated at 15% per year.1. The depreciation for Equipment, Transportation Vehicle and Computer Systems will be charged to the factory, while that of the fixtures and fittings will be charged to the office.Credit Purchases and Sales1. 30% of the purchases of raw material will be on credit, and will be payable within 1 year. Closing balances of accounts payable are calculated through an Accounts Payable Budget.1. 70% of the sales will be on credit, and customers will be allowed a payment period of 1 month. Closing Balances of Accounts Receivable are calculated through an Accounts Receivable Budget.Financial Statements1. Forecasted Financial Statements are prepared for 5 years, 2014 through 2018.1. Forecasted statements include Income Statement, Statement of Changes in Equity, Balance Sheet and Cash Flow Statement.1. All financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS).

Financing1. An initial investment of PKR 51,495,000 will be required, which will be financed 50% through debt and 50% through equity.1. Debt includes a long term loan of PKR 25,747,500 at an annual interest rate of 14%. It will be repaid in equal annual payments of PKR 6,004,121.1. Equity will involve an issue of 1,494,200 common stocks at a price of Rs. 17.23 each. The face value of each common stock is Rs. 10.1. Dividends in 2014 are paid at Re. 1 per share. They will increase in each year at a constant rate of 10%.1. Corporation Tax is paid at a rate of 34% each year. Taxation of each year is paid in the subsequent year.WACC Calculation1. The Weighted Average Cost of Capital (WACC) is calculated using the CAPM Approach.2. Weightage of Debt and Equity is 50:50.3. The Market Risk Premium is taken from World Bank figures for Pakistan, which is 2.5%.4. The beta is taken from the website of Pakistan Institute of Development Economics (PIDE).

RATIO ANALYSISProfitability Ratios1. Gross profit Margin: The gross profit margin of a company measures the percentage of each sales dollar remaining after deducting the cost of goods sold. The gross profit margin of our company is 23.25% , 24.84%, 24.83%, 24.95%, 24.99% in year 2014 2015 2016 2017 2018 respectively. There is very less difference between the gross profit margins throughout the 5 years this is because the cost and price are almost increased by the same assumed inflation rate.2. Net profit Margin:

The net profit margin measures the percentage of each sales dollar remaining after all cost and expenses including interest and taxes have been deducted.Thus our companys net profit margin is steadily increasing, it is 8%, 9%, 10%, 10%, 11% in years 2014 2015 2016 2017 2018 respectively. Two elements contribute greatly to this trend firstly; the depreciation is high in the earlier years and low in the later year i.e. reducing balance, secondly, finance cost is reducing in the later years because some principal is being paid. 3. Operating profit Margin:

Operating profit margin measures the percentage of each sales dollar remaining after all costs and expenses other than interest, taxes and preferred stock dividends are deducted.Thus our companys operating profit margin is constantly increasing, it is 13.58%, 15.53% 15.79%, 16.14%, 16.40% in years 2014 2015 2016 2017 2018 respectively. This is solely because of high depreciation in earlier years and low depreciation in later years i.e. reducing balance method of depreciation.4. Return on Asset:

It measures the overall effectiveness of management in generating profits with its available assets. Our companys operating profit margin is constantly increasing; it is 23.48%, 30.21%, 32.71%, 34.98%, 36.67% in years 2014 2015 2016 2017 2018 respectively. This is because our sales are increasing whereas there is no capital expenditure, hence, asset utilization is increasing therefore ROA is increasing.5. Return on Equity:

It measures the return earned on common stockholders investment in the firm. Our company has less ROE in the beginning but it increases in the later years this is because sales are increasing and so do the profits but the common stockholders equity has increased proportionately less i.e. 30% retained earnings and no new issue of shares. 6. Contribution Margin Ratio:

Contribution margin ratio is contribution margin as the percentage of sales. Contribution margin ratio is approximately 26% throughout the years span. This is because the increase in variable cost and the selling price is both increased by the assumed inflation rate; hence, the ratio is fairly consistent.Liquidity Ratios1. Current Ratio:It tells about the firms ability to meet its short term obligations. Our current ratio is 2.16, 2.18, 2.18, 2.19, 2.20 in years 2014 2015 2016 2017 2018 respectively. The ratio is quite favorable and is stable over the years.2. Quick Ratio:

It gives the measure of overall liquidity of the firm when a firms inventory cannot be easily converted into cash. Our liquidity ratios in years 2014 2015 2016 2017 2018 are 1.30, 1.33, 1.36, 1.39, 1.42 respectively. This ratio shows that the firm is holding quite a lot of inventory, nevertheless, the liquidity condition of the company is still good as it is still able to cover its short term obligations.Activity Ratios1. Inventory Turnover:

It measures the liquidity of firms inventory. Our inventory turnover ratios in years 2014 2015 2016 2017 2018 are 9.60, 8.69, 8.67, 8.71, 8.74. it is high in the first year due to no opening inventory, whereas in later years it is slowly increasing.2. Receivable Turnover:

It is an activity ratio which estimates the number of times a business collects its average accounts receivablebalance during a period. Our values of receivable turnover is 6 in all years 2014 2015 2016 2017 2018 respectively. It is because we have kept debtor time period of 60 days to recover. On average company collects its accounts receivable 6 times.3. Payable Turnover: The accounts payable turnover ratio is a liquidity ratio that shows a company's ability to pay off its accounts payable by comparing net credit purchases to the average accounts payable during a period. Our values are 6 in all years 2014 2015 2016 2017 2018 respectively. They are fixed because we have kept fixed time period of 60 days to pay the accounts payable. Thus in a single year there are 6 payments.4. Total Asset Turnover:

The amount of sales or revenues generated per dollar of assets. The Asset Turnover ratio is an indicator of the efficiency with which a company is deploying its assets. Our values of total asset turnover are 2.96, 3.18, 3.32, 3.41, 3.47 in years 2014 2015 2016 2017 2018 respectively. They are increasing over time because of our increase in sales.5. Fixed Asset Turnover:It is a financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. Our values of fixed asset turnover are 11.07, 15.20, 20.55, 27.87, 37.89 in years 2014 2015 2016 2017 2018 respectively. They are increasing due to the efficient use of fixed assets and increase in sales.DEBT RATIOS1. Debt Ratio:

It is a financial ratio that measures the extent of a companys or consumers leverage and can also be interpreted as the proportion of a companys assets that are financed by debt. Our values of debt ratios are 60%, 56%, 52%, 48%, 45% in years 2014 2015 2016 2017 2018 respectively. They are decreasing over the years because long term loan principal is being paid each year, hence, the debt ratio is decreasing over time.2. Times Interest Earned Ratio: It is a metric used to measure a company's ability to meet its debt obligations. It is usually quoted as a ratio and indicates how many times a company can cover its interest charges on a pretax basis. Failing to meet these obligations could force a company into bankruptcy. It is also referred to as "interest coverage ratio" and "fixed-charged coverage. Our values are 8.75, 13.51, 18.68, 27.00, 41.19 over the years 2014 2015 2016 2017 2018 respectively. They are increasing because our operating profits are increasing due to increasing sales and finance cost is decreasing.3. Debt to Equity Ratio:

Debt-to-Equity ratio is the ratio of total liabilities of a business to its shareholders' equity. It is a leverage ratio and it measures the degree to which the assets of the business are financed by the debts and the shareholders' equity of a business. Our values are 60%, 56%, 52%, 48%, 45% in years 2014 2015 2016 2017 2018 respectively. They are decreasing because our total liabilities and equity are increasing at a rate greater than total liabilities.

INVESTMENT APPRAISALInvestment Appraisal is the process of evaluating different investment alternatives, with the objective of choosing those which maximize the wealth of shareholders. The financial feasibility of Dhaaga Saaz has been evaluated using multiple investment appraisal techniques. The Net Present value (NPV) of our business is about PKR 46 million, which is quite an attractive NPV for a medium size business. This shows the present value of all expected future cash flows till perpetuity. Cash flows to perpetuity are considered because our business is a going concern and hence expected to operate for the foreseeable future. The time horizon for NPV calculation if 5 years, however the terminal value of the business is included in the cash flow of the 5th year to account for the present value of the business after that. Taxes are assumed to be paid one year in arrears. Although the NPV shows an attractive investment, a more meaningful interpretation of the figure will be possible when it is compared with NPVs of alternative investments. The terminal value of the business is based on a terminal value multiple of 2 (on the after-tax Operating Cash flows of the 5th year). The present values of the cash flows for the 5 years are shown in the graph below.

The Weighted Average Cost of Capital (WACC) of our business is 10.43%. The WACC is calculated using the CAPM approach. The market risk premium figure of 2.5% is the World Bank risk premium for Pakistan. The risk free rate of return is based on the market yield of a 6-month T-Bill of the Government of Pakistan. Furthermore, the beta figure of 0.661 is the beta of the textile industry taken from the statistics of Pakistan Institute of Development Economics (PIDE).The Internal rate of return (IRR) of our business is 30%. IRR shows the return from a project based on cash flows. An IRR of 30% shows a very attractive investment and complements the previous interpretation of the NPV figure. This is higher than our Weighted Average Cost of Capital (WACC) which is 10.43%, hence this investment opportunity should be accepted and is expected to generate high returns. The IRR figure of 30% also signifies that the maximum cost of capital for Dhaaga Saaz is 30%, after which it will lead to a negative NPV. So this IRR is far away from our current WACC of 10.43% and shows a safe position that small changes in WACC will not render this project infeasible. The Payback Period shows the amount of time in which the initial investment of the project can be recovered. For our business, the initial investment can be recovered in 3 years and 6 months, which is a short period and hence very attractive for investors. The payback period based on discounted cash flows is 4 years and 1 month. This increase is due to the discounting of cash flows, and still indicates a short payback period. The discounted payback period is graphically represented in the figure below.

The Average rate of Return (ARR) shows the average profitability of the business in each year. For our business it is 190%. This is a very high rate of return and adds to the attractiveness of the investment opportunity. This is very high due to the fact that in the five years no new capital investment is done and the present value of the investment has almost halved in the five years, averaging out a fairly high rate of return on the average investment. Another reason is the high growth rate of the profits of the business. There is a huge potential for profit growth in the textile sector of Pakistan and high growth rates are not uncommon. This potential is expected to be realized by our business and a high ARR is expected.Hence, according to the different techniques of Investment Appraisal used to evaluate this investment, it has proven to be an attractive investment which is expected to generate high returns I the future.COMMON SIZE INCOME STATEMENTAs the company is started as an entrepreneurial venture and new in the market, that is why we have no opening stock. We have assumed that the closing stock at the end of the year will be same (8% of the sales revenue). Sales are increasing throughout the five years because the variables (Population and Advertisement expenditure) we have selected for regression analysis are increasing over the five years period. Also the price is increasing due to inflation. These two effects (Regression and Inflation) collectively increase the sales revenue. Coming to the cost of production, it is increasing from 2014 to 2015, and then it remains constant throughout the next three years. The reason for this fluctuation in the cost of production is the rapid growth in sales in the first two years. After the first two years, company is witnessing a steady growth in sales which ultimately relaxes the growth in cost of production.As far as Gross profit is concerned, after increasing in the first year it remains constant for the next four years. This is due to the fact that the sales and cost of production are increasing at the same rate. Also beginning stock and ending stock are same over the five years. These same beginning and ending stock results in same cost of goods sold which ultimately leads to constant gross profit.Fixed expenses are increasing only because of inflation effect while sales have both regression and inflation effects. Thats why the ratio of fixed cost to sales revenue is decreasing over the 5-years period. Gross profit is constant over the 5-years period and the operating expenses are decreasing. So, the operating income has an increasing trend as it is net of gross profit and operating expenses.

Coming to the tax, it is constant throughout the 5-years period. As, operating profit are increasing, the absolute value of taxes are increasing as we go from 2014 to 2018. Common stocks are issued at the beginning of first year and are same in the following 4 years. As net income is increasing and the stocks are constant, earning per share (EPS) is increasing.

COMMON SIZE BALANCE SHEETIn the beginning year, 73% of the total assets are composed of current assets and the other 27% of total assets are of non-current or fixed assets. This ratio is increasing throughout the 5-years. We will see individual elements of total assets to analyze the reasons for this increase.

First of fall, the cash is increasing due to the increase in the operating profit. Accounts receivables are increasing during the five years which indicates that our receivable turnover is decreasing over time. This means that customers are taking more time to pay their payments which is ultimately increasing average collection period. The finished good inventory is quite high in the first year and this tails in the following years as well. This shows that we are keeping too much finished good inventory in the warehouses. Raw material inventory is constant throughout the five years. Although the absolute values of raw material inventory is increasing as the production is increasing. But the ratio of raw material inventory to total assets is almost constant.Coming to the values of non-current assets like equipment, transportation vehicle, computer systems and fixture & fittings, these values are decreasing from 2014 to 2018. The reason is that no fixed asset is purchase in the four years other than the beginning year. The values of these assets are absorbing depreciation and are declining in the following years. The equity to liability ratio in the first year is 40% to 60%. It is increasing in the coming years. We will see the details of individual elements for this increment.First of all accounts payable are constant which indicates that there is no change in the creditors policy over the five years. Payable turnover is almost same and so is the average payment period. Loan payments are constant because no loan has been taken in the next four years other than the beginning year. Tax payments are increasing as the operating income is increasing. Principal amount of loan is decreasing because of annual loan payments. The rapid increase in retained earnings in the following years is because of quick growth in net operating income.

SENSITIVITY ANALYSISSensitivity of the model will be analyzed through optimistic, base and pessimistic approach. Analysis will be based on the effect of changes in different variables on NPV of the model. First of all, increasing sales price by 5% from its base case increases NPV from 1269177 to 43383462. The reason for this is that by increasing the sale price assuming everything else constant, cash flow increases over the next five years which results in increased present value. The result of these changes will be an increased NPV value. -5%5%

PessimisticSameOptimistic

475500525

PessimisticMost likelyOptimistic

(27,853,061) 1,269,177 43,383,682

Similarly a 5% decrease in sale price will reduce the NPV value to (27853061).Fixed Cost2014

-5%5%

Optimistic SamePessimistic

10317000 10860000 11403000

OptimisticMost likelyPessimisticRange

2,691,157 1,269,177 (152,804) 2,843,960

As it is depicted in the above table that increasing the fixed costs by 5%, NPV value falls down to (152804). The reason is that the increase in cost decreases net cash inflows which results in low NPV value. The same logic applies when fixed cost is reduced by 5%.

Variable Cost2014

-5%5%

OptimisticSamePessimistic

169405851.2178321948.6187238046.1

OptimisticMost likelyPessimisticRange

5,147,383 1,269,177 (2,609,030) 7,756,412

As depicted in the above table, increasing the variable cost by 5% changes the NPV value from 1269177 to (2609030). The reason for this reduction is that by increasing the variable cost, the net cash flow decreases. This will ultimately result in reduced value of NPV. Same is true when variable cost reduces. Inflation2014

-5%5%

OptimisticSamePessimistic

8%13%18%

(1,267,171) 1,269,117.00 8,671,329.00

As it is clear from the above table that increasing the inflation by 5%, the NPV will change from 1269117 to 8671329. The reason for this shift in NPV is that when inflation increases the overall cash flows of the company increases and the incremental cash inflow is greater than the incremental cash outflow. Thats why NPV is greater than the base case. The same logic holds when inflation decreases.

WAACWAAC6.78%10.43%7.497%

NPV188696245,936,770660337

Percentage Change49%-48%

As depicted from the table, it is clear that increasing the WAAC from 7.14% to 7.497% will result in increase in NPV from 1269177 to 660337. As the cash flows are discounted at WAAC, so when we increase the WAAC the present value of cash flows reduced. This is the reason why NPV reduces when WAAC increases. Similarly if we reduce WAAC, the present value of cash flows increases, which results in high value of NPV.SCENARIO ANALYSISScenario Analysis is a process to ascertain and analyze possible future events that can take place in the future given certain assumptions. This is an important tool in the world of finance and economics, and is used extensively to make projections for the future. In our model, we analyzed three scenarios namely; worst or pessimistic (Recession), most likely (Current) and best or optimistic (Boom) scenarios. The current scenario of our model is the most likely situation expected to happen in real business world as it is developed with much sophistication and taking into consideration all relevant factors. Below are few income statement items which are considered to be affected by changes in economy based on scenarios.Sales Sales are determined by level of economic activity in the market. During recession economic activity decreases while in case of economic boom, economic activity increases. But how much the economic activity increases or decreases depend on the situation and cannot be forecasted with much accuracy. So we assumed that sales will increase by 30% in boom and decrease by 30% during recession. Graphically, these changes are shown below.

Cost of Goods Sold As most components of COGS are variable and include salaries, cost of inventory and cost of production. These costs tend to decrease during recession and vice versa in boom as salaries and wages decline during recession. Also due to low economic activity during recession, inventories pile up and manufacturers will reduce prices in order to sell inventory. So cost of inventory goes down in recession while exactly opposite will happen in boom. We assumed here that COGS will change by +- 15%. Gross Profit Based on the above projection of sales and cost of goods sold gross profit comes out be as follows graphically. During recession, gross profit has decreased by 80%, 75%, 75%, 75% and 75% from 2014 to 2018 respectively while it increased by 80%, 75%, 75%, 75% and 75% from 2014 through 2018 respectively as compared to the current situation.

Selling & Admin Expenses Selling and administrative expenses ate affected in the same way as COGS as salaries and wages of employees tend to decrease during recession and will increase during boom. Here we again assumed a rate of +-15% change of current expenses in both the scenarios.Operating Profit Based on above formulations, operating profit decreases from current scenario by 125%, 112%, 110%, 108% and 106% from 2014 through 2018 respectively and it increases from current scenario by 125%, 112%, 110%, 108% and 106% from 2014 through 2018 respectively. As the decrease in operating profit during recession is greater than 100% we incur losses during recession.

Finance Cost Interest rates determine finance cost and it decreases during recession as investors expectations of future cash flows decreases because of low economic activity and increases in boom as investors expectations of future cash flows increases because of high economic activity. In our model, interest rate is 14% and we assumed it to decrease to 10% in recession and it will increase to 18% in boom. Based on these assumptions, finance cost decreases by 29%, 30%, 31%, 32% and 33% from 2014 through 2018 respectively.

TaxationTax rate also changes with changes in economic activity but it is a slow and passive process and not as much responsive to market level of activity as that of interest rates. Tax rates are primarily determined by governments and its variability depends on government policies. Usually government decide tax rate taking into consideration the economic level of activity. In the model, we have set a tax rate of 34%. In the two scenarios, we assumed that government will realize the economic situation after two years and decrease tax rate to 30% in recession in order to increase disposable income and bring the economy out of recession. While in the case of boom in market, government, realizing the greater disposable income, will increase tax rate to 40%. But in case of recession, we will incur losses as given above, no taxation will be charged. However when there is a boom in the economy, taxation increases from the current case.

Profit after TaxIn case of boom, profit after tax is 138%, 118%, 95%, 92% and 89% more than the current profit after tax from 2014 through 2018 respectively and are all positive. While during recession, as we incurred operating losses, profits after tax are also negative and are decreased by 158%, 128%, 122%, 116% and 113% from current situation from 2014 through 2018 respectively.

Earnings per Share (EPS) Earnings per share are average amount per share available to shareholders after tax payments. In case of recession, we incur an operating loss, so no amount available to shareholders while in case of boom in the market, more cash become available to shareholders and earnings per share increased by 138%, 118%, 95%, 92% and 89% from current EPS from 2014 through 2018 respectively.