Economics Analysis of a Jacket Factory in Nepal

7/28/2019 Economics Analysis of a Jacket Factory in Nepal

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CONTENTS

LIST OF FIGURES .............................................................................................................. 2

LIST OF TABLES ................................................................................................................ 3

LIST OF SYMBOLS ............................................................................................................ 4

1. EXCECUTIVE SUMMARY ..................................................................... .................... 5

2. INTRODUCTION ......................................................................................................... 6

2.1 BACKGROUND .................................................................................................... 6

2.2 JACKET MANUFACTURING PROCESS ............................................................. 7

2.3 ABOUT OUR PRODUCT (JACKET) AND COMPANY ................... .................... 8

3. PROBLEM STATEMENT ................................................. ......................................... 114. OBJECTIVES .............................................................................................................. 12

5. LITERATURE REVIEW ............................................................................................. 13

6. METHODOLOGY ...................................................................................................... 18

7. FINDINGS AND DISCUSSION ................................................................................. 19

8. CONCLUSION AND RECOMMENDATIONS ........................................ .................. 29

REFERENCES ................................................................................................................... 30

APPENDIX A ..................................................................................................................... 31

APPENDIX B ..................................................................................................................... 33


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LIST OF FIGURES

FIG

2.1

TITLE

Flow chart indicating manufacturing process

PAGE

7

7.1 Estimated Net Cash Flow Diagram(A1) 24

7.2 Estimated Net Cash Flow Diagram(A2) 24

7.3 Annual Equivalent Cash Flow Diagram(A1) 26

7.4 Annual Equivalent Cash Flow Diagram(A2) 26

7.5 NPV vs Interest Rate diagram for both alternatives 27


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LIST OF TABLES

TABLE

7.1

TITLE

Project Capital Costs

PAGE

19

7.2 Estimated Annual Operating Costs 19

7.3.1 Net Income Calculation for A1 20

7.3.2 Net Income Calculation for A2 20

7.4 Depreciation Calculation for Generator 21

7.5 Depreciation Calculation for Sewing Machine 22

7.6 Depreciation Calculation for Lamination machine 22

7.7 Estimated Year End and Cash Flow 23

7.8 Discounted Payback Period Calculation for A1 25

7.9 Discounted Payback Period Calculation for A2 25

7.10 IRR Calculation 27

7.11 Comparison between two alternatives 28


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LIST OF SYMBOLS

A1 : alternative 1 (lamination done at external)

A2 : alternative 2 (lamination machine bought)

MARR : Minimum Attractive Rate of Return

AE : Annual Equivalent

IRR : Internal Rate of Return

FW : Future Worth

NPV : Net Present Value


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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 , reasonablypriced 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 andfurniture 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 firstalternative is more feasible than the second alternative.


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2. INTRODUCTION

2.1 BACKGROUND

The development of a country depends upon the establishment of industries. Present age is anindustrial 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 jacketmanufacturing 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.


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2.2 JACKET MANUFACTURING PROCESS

Fig. 2.1 Flow chart indicating manufacturing process

Procurement of raw materials (raw

clothes, zipper, thread, button, lock, etc.)

Stiching of cloth by automatic sewing

machine giving the shape of jacket

Finishing of jacket

Cutting of cloth for each piece of jacket

Logo is fixed in each jacket cloth piece

Lamination of stitched jacket

Measurement of clothes for each piece of

jacket is carried out.

Packing of jacket in plastic bag


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The flowchart of the jacket manufacturing process is briefly discussed below:

At the initial stage, the raw materials required for manufacturing jacket arecollected 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 measuredmanually.

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 andretailers.

2.3ABOUT 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.


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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, onemanager, 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.


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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. Thejacket 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 ofPASS 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 inKathmandu

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. Payback period

2. Discounted payback period

3. Net present value method

4. Net future value method

5. Capitalized equivalent method

6. Annual equivalent worth method

7. 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 recognizedlimitations. (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 onlyoutflow 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 long-

term 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... It means... Then...

NPV > 0 the investment

would add

value to the

firm

the project may be accepted

NPV < 0 the investment

would subtract

value from the

firm

the project should be rejected

NPV = 0 the investment

would neither

gain nor lose

value for the

firm

We should be indifferent in the decision whether to

accept or reject the project. This project adds no

monetary value. Decision should be based on other

criteria, e.g. strategic positioning or other factors not

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


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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 methodThe 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 MethodIn 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 A1 A2

Sewing Machines 525000 525000

Generator 500000 500000

Furniture-Cutting Tables 90000 90000Scissors and Measuring

Tape 8000 8000

Lamination Machine 0 1000000

Registration*** 35200 35200

Deposit 4000 4000

Transportation van** 1800000 1800000

Computer* 50000 50000

Miscellaneous 100000 100000

Total 3112200 4112200

For any project initial investment is needed. In our project, the initial investments for thetwo 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 A1 A2

Rent 300000 300000

Labour 2160000 2448000

Administration 384000 384000

Clothes 810000 810000

Inventory handling 84000 100000

Zipppers and Lamination 810000 660000

Electricity 10000 14000

Generator Running 159667 220000

Lubrication 90000 104400Maintenance 90000 106800

Transportation cost 194600 194600

Threads 162000 162000

Packing cost 13500 13500

Miscellaneous 50000 50000

Total 5317767 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

S.N EXPENSE SALES

BANK

INTEREST REVENUE

INCOME

BEFORE TAX TAX

NET

INCOME

1 5317767 2700 242752 5940000 379481 94870 284611

2 5762864 3057 242752 6724793 719178 179794 539383

3 6245216 3461 242752 7613274 1125306 281327 843980

4 6767940 3918 242752 8619140 1608448 402112 1206336

5 7334417 4435 242752 9757902 2180733 545183 1635550

6 7948308 5021 242752 11047116 2856057 714014 2142043

7 8613581 5685 242752 12506663 3650330 912582 2737747

8 9334538 6436 242752 14159044 4581755 1145439 3436316

9 10115839 7286 242752 16029738 5671148 1417787 4253361

10 10962534 8249 242752 18147589 6942303 1735576 5206727

Table 7.3.2: Net Income Calculation for A2

S.N EXPENSE SALES

BANK

INTEREST REVENUE

INCOME

BEFORE TAX TAX

NET

INCOME

15567300 2700 320752 5940000 51948 12987 38961

26033283 3057 320752 6724793 370759 92690 278069

36538269 3461 320752 7613274 754253 188563 565690

47085522 3918 320752 8619140 1212867 303217 909650

57678580 4435 320752 9757902 1758570 439642 1318927

68321277 5021 320752 11047116 2405088 601272 1803816

79017768 5685 320752 12506663 3168143 792036 2376107

89772555 6436 320752 14159044 4065737 1016434 3049303

910590518 7286 320752 16029738 5118468 1279617 3838851

1011476945 8249 320752 18147589 6349892 1587473 4762419


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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 Bn-1 Dn Bn

1 120000 24000 96000

2 96000 19200 768003 76800 15360 61440

4 61440 12288 49152

5 49152 9830 39322

6 39322 7864 31457

7 31457 6291 25166

8 25166 5033 20133

9 20133 4027 16106

10 16106 3221 12885

Sewing Machines:

Table7.5: Depreciation Calculation for Sewing Machines

Year n Bn-1 Dn Bn

1 525000 105000 420000

2 420000 84000 336000

3 336000 67200 268800

4 268800 53760 215040

5 215040 43008 1720326 172032 34406 137626

7 137626 27525 110100

8 110100 22020 88080

9 88080 17616 70464

10 70464 14093 56371


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Lamination Machines:

Table7.6: Depreciation Calculation for Lamination machine

Year n Bn-1 Dn Bn

1 1000000 200000 8000002 800000 160000 640000

3 640000 128000 512000

4 512000 102400 409600

5 409600 81920 327680

6 327680 65536 262144

7 262144 52429 209715

8 209715 41943 167772

9 167772 33554 134218

10 134218 26844 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 WITHOUT(a1) WITH(a2)

0 -3112200.00 -4112200.00

1 773611.05 727961.30

2 930583.23 829269.05

3 1156939.67 1006649.94

4 1456704.06 1262417.93

5 1835844.18 1601141.87

6 2302278.41 2029587.26

7 2865935.82 2556724.31

8 3538866.64 3193796.52

9 4335401.51 3954446.24

10 3667569.35 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

Period (n) Cash flow

Cost of

funds(@Marr=13%)

Ending Cash

Balance

0 (3112200.00) (3112200.00)

1 773611.05 (404586.00) (2743174.95)

2 930583.23 (356612.74) (2169204.46)

3 1156939.67 (281996.58) (1294261.37)

4 1456704.06 (168253.98) (5811.29)5 1835844.18 (755.47) 1829277.42

6 2302278.41 237806.06 4369361.90

7 2865935.82 568017.05 7803314.77

8 3538866.64 1014430.92 12356612.33

9 4335401.51 1606359.60 18298373.44

10 3667569.35 2378788.55 24344731.33

Table 7.9: Discounted Payback Period Calculation for A2

Period (n) Cash flow

Cost of

funds(@marr=13%)

Ending Cash

Balance

0 (4112200.00) (4112200.00)

1 727961.30 (534586.00) (3918824.70)

2 829269.05 (509447.21) (3599002.86)

3 1006649.94 (467870.37) (3060223.29)

4 1262417.93 (397829.03) (2195634.40)

5 1601141.87 (285432.47) (879925.00)

6 2029587.26 (114390.25) 1035272.01

7 2556724.31 134585.36 3726581.69

8 3193796.52 484455.62 7404833.839 3954446.24 962628.40 12321908.46

10 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 A1 A2

0% 19,751,533.92 15,807,273.77

10% 9,038,050.98 6,535,453.35

20% 4,114,972.66 2,252,896.68

30% 1,607,009.00 62,285.51

40% 211,395.71 (1,160,719.07)

50% (626,255.48) (1,896,725.64)

60% (1,162,541.58) (2,368,996.85)70% (1,525,232.08) (2,689,030.22)

80% (1,782,155.49) (2,916,153.63)

90% (1,971,408.40) (3,083,750.03)

100% (2,115,480.96) (3,211,555.19)

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.

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


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Table 7.11: Comparison between two alternatives

Column1 PROJECT A1 PROJECT A2

NPV 7,171,674.19 4,914,097.73

IRR 42% 30%FW 24,344,965.20 16,681,396.17

AE 1,321,739.55 905,668.21

per month income 110,144.96 75,472.35

per sale income 440.58 301.89

per owner 27,536.24 18,868.09

per owner per year 330,434.89 226,417.05

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 RECOMMENDATIONSThis assessment finds the establishment of the proposed jacket factory at Thankot,

Kathmandu feasible with both the alternatives presented above. However, for this small-

scale 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 theassumptions 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-sales-

repair/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-tax-

rates.html

TRADING ECONOMICS. (2013, June 5). Retrieved June 5, 2013, from

http://www.tradingeconomics.com/nepal/inflation-cpi


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APPENDIXA

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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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.

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.

RENTAdvance (NRs) 200000

Rent for office (NRs) 5000

Rent for working room (NRs) 10000

No of working rooms 2

Rent per month (NRs) 25000

Rent per year (NRs) 300000

CALCULATION OF MARR

For Project A1 For Project A2

Rate of interest on equity

(Re) 18% 18%

Rate of interest on debt (Rd) 13% 13%

Total debt (D) 1867320 2467320Total equity (E) 1244880 1644880

Total investment (I) 3112200 4112200

Rate of tax (T) 25% 25%

MARR 13.05% 13.05%

LABOUR COST

Out sourcing lamination

machine

No of labor 15

Labor salary per month (NRs) 12000

Labor salary per year (NRs) 2160000

Installing lamination machine

No of labor 17

Labor salary per month (NRs) 12000

Labor salary per year (NRs) 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) 16000

per year (NRs) 192000

Receptionist salary



Security guard salary



Total administrative costper month (NRs) 32000


COST OF RAW CLOTHES

Cost of raw cloth per meter (NRs) 150

Raw cloth required to make a jacket in

meter 2

No of jacket to be produced per year 2700Total cost for clothes per year (NRs) 810000

ZIPPER, LAMINATION AND OTHER

COST

Out sourcing lamination

Cost of zipper, button, logo per jacket

(NRs) 210

cost of lamination per jacket (NRs) 90

No of jackets 2700

Total cost per year (NRs) 810000


Cost of zipper, button, logo per jacket

(NRs) 210

No of jackets 2700

Total cost per year (NRs) 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) 35000No of sewing machine 15

Total cost of sewing machine 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) 22500

No of cutting tables 4Total cost of cutting table (NRs) 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) 200

No of scissors and tapes (each) 20

Total cost of scissors and tapes 8000

PACKAGING COST

Packaging cost per jacket (NRs) 5No of jackets 2700

Total cost of packaging per year(NRs) 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 Sales

1 800

2 10003 1300

4 1400

5 1700

6 1900

7 2000

8 2200


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COST OF LAMINATION MACHINE

Cost of lamination machine (NRs) 500000

No of lamination machine 2

Total cost of lamination machine (NRs) 1000000

The cost of lamination machine is obtained from the following source:

(ALIBABA, 2013)

COST OF GENERATOR

(NRs)

Cost of generator 500000

No of generators 1

Total cost of generator 500000

The cost of generator is obtained from Kirlosker Generator House located at Naxal.

(Kirloskar Generators, 2013)

TRANSPORTATION COST

Driver salary per month (NRs) 9000

Maintenance cost per month 2000

Road tax cost per year (NRs) 18000

Third party insurance cost per year

(NRs) 5000

Mileage of vehicle 15

Cost of diesel per litre (NRs) 99Distance traveled per month 500

cost for diesel per month (NRs) 3300

Total transportation cost (NRs) 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


No of machine (sewing machine) 15

Cost of lubrication per month per sewing machine (NRs) 500

No of lamination machine 2

Cost of lubrication per month per lamination machine

(NRs) 600

No of months 12

Total cost of lubrication per year (NRs) 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 REMARKSNo of jackets produced per year 2700

No of sewing machine available 15

No of working days in a month (average) 24

No of working months in a year 11

No of jackets produced per day per machine 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.

Documents

Economics Analysis of a Jacket Factory in Nepal