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LETTER OF TRANSMITTAL
December 27th, 2005 Mr. Siddique Khatri College of Business Management Karachi. Dear Mr. Khatri Here is the feasibility report on Lucky Cement Limited you had asked to conduct and submit as a learning requirement for the course, Corporate Finance by December 27th, 2005. We hope it fulfills the requirements laid by the Institute of Business Management. Sincerely, Eisha Quraishi Tariq Hasan Maria Moten ID # 2002-2-7-2307 (add) (add)

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Acknowledgment
T he teachers at CBM have provided us with skills and knowledge that will go a long way as we enter this fast moving era. Thank you Mr. Siddique Khatri, for giving us an opportunity to prepare this report for you, we really hope that it meets your expectations. We would like to extend our gratitude to the wonderful people at Lucky Cement for their time and assistance. Special thanks to the Finance Manager, Mr. Aftab Ahmed at Lucky Cement for providing us with the information required to prepare this report Also, without our team effort, it would not have been possible to make this challenging project into an exciting and learning experience. We appreciate each others contribution to this group assignment. Sincerely, Eisha Quraishi Tariq Hasan Maria Moten ID # 2002-2-7-2307 (add) (add)

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TABLE OF CONTENTS
Executive Summary.....04 Introduction to Lucky Cement...05 Production and Sales..... 07 Plant Information...09 Future Prospects for Lucky Cement......11 Purpose of Our Report...........12

Analysis of Expansion Plan....13 Benefits of Expansion...13 Issues Relating to Expansion........15 Capital Budgeting Tool Application..17 NPV, IRR and Payback Calculations....18 Assumptions Made....19 Conclusion21

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Executive Summary
(Maria has to do the Executive Summary) Baig Spinning Mills Ltd is a listed textile spinning unit on the Karachi Stock Exchange and has been operating since last 32 years. Baig Spinning Mills Ltd yearns to become highly reliable source of supply of yarn by effectively fulfilling the needs of customers through an efficient use of manufacturing facilities and maximizing return to the shareholders with due consideration to their social responsibilities and obligation. The company operates 15,192 spindles and is already engaged in the gas based captive power generation. They have continuous production for 24 hours and even on Sundays they are producing, i.e. they operate continuously through out the year while giving breathing space to the production facilities occasionally for servicing. They switched over to gas based captive power generation due to the inadequate availability of gas supply, non-reliability of grid power supply, poor quality of grid supply, increasing tariff and expansion requirements compelled the company to switch over to gas based captive power generation thus saving a huge amount of money for the company. The per unit cost for KESC is calculated to be Rs 5.15/KWH while that for the gas generator is calculated to be Rs. 2.67/KWH. The difference of Rs. 2.48/KWH is the current savings per unit, however the savings per unit are projected to decrease based on our calculation incorporating the inflationary effect on the input of the gas generator and the decreasing KESC cost per unit., however for our feasibility report purpose we have assumed KESC per unit cost to be constant if not decrease further. Even the minutest of the calculations and assumptions have been taken care of, properly stated and reflected in our calculations. The Capital budgeting tools have been appropriately applied and the calculation is based on projections for 10 years at an opportunity cost of capital of 10% amounting to Rs.18.94m and the IRR is calculated to be 20% while the payback period is

calculated to be 3.89 years.

Huge NPV positive amount will add value to the shareholders wealth thus achieving the objective of the company while the IRR 20% also seems to be attractive and the payback period of around 4 years is a reasonable tenure, so by all means we are in favor of company operating on gas based captive power generation.

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LUCKY CEMENT LIMITED - PAKISTAN HALLMARK FOR BEST QUALITY CEMENT

HIGH STRENGTH, OPTIMUM SETTING TIMES AND MINIMUM EXPANSION These are the three bench marks adopted by the Pakistan based Lucky Cement Limited that is emerging to be the largest cement plant of Asia and committed to provide the best quality cement to its customers round the globe through stringent quality control and application of most modern quality control techniques. Sponsored by well known Yunus Brothers Group one of the largest textile export house of Pakistan, Lucky Cement Limited is presently a 9,000 Tons per day, dry process Cement Plant, located in Pezu, Distt. Lakki Marwat on the main Indus Highway between D.I.Khan & Bannu in North Western Frontier Province of Pakistan. In order to supply uninterruptible power, the Company has also established a 42.84 MWH Power Plant consisting of Wartsila Finland Engines, along with the Cement Plant. The Power Plant is one of the best maintained power generation facility of the country and is maintained and operated round the clock by expert engineers and technicians. Considering significant growth in cement demand, the company is constructing two additional production lines at its existing Site in Bannu Division. The first phase of expansion Project at Pezu has already completed and the equipments have also started operation during the financial year ended on 30th June, 2005. Works are in full swing to complete the second phase of expansion Project at Pezu. It is hoped that the new capacity will be in full production by the first quarter of next calendar year. With a strategy to capture southern markets as well as to further grab the export potential, the company is installing a Green Field Plant, in the southern part of the country, in Karachi on Super Highway. When all the expansion projects are implemented the company will have a total production capacity of more than 22,000 tons of cement per day. The expanded plants will have their own power generation. The total cost of expansion projects including Power Plants has been estimated at around Rs. 12 Billion.

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Mission Statement
The mission that drives us is ongoing and challenging; it is to maximize the value of the Company to Customers, Employees and Shareholders by producing quality products at the least possible cost and to provide our products and services to the market

Vision Statement
To build on the strength of our core business as well as our resources, by investing in areas where we see potential for strong, sustainable growth in earning

ISO CERTIFICATION: Lucky Cements plant is one of the best maintained plants of Pakistan and is managed by qualified and expert cement field specialists. The Company has also got ISO 9001:2000 certifications, for manufacture and sales of cement by UKAS Quality Management, Pakistan National Accreditation Council and Moody International.

QUALITY MANAGEMENT: Lucky Cement always gives major emphasis to manufacture of high quality cement through stringent quality control techniques and computerized control systems using advance state of the art sophisticated equipments like Distributed Control System (DCS), Programmable Logic Controllers (PLCs) and on line X-Ray Analyzers. The Company has got one of the best equipped laboratories, having all facilities for the analysis of raw material, semi furnished product, furnished product and fuel, to ensure the supply of high quality product to market. The quality of Companys cement has been tested and found to be superior in many respects to the specifications mentioned in revised edition of Pakistan Standard PSS 232-1983(R) and British standard BS 12:1978

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PRODUCTS: The following premium brands are available throughout the country:
1. 2. 3. Lucky Gold Brand Lucky Brand Lucky Star Brand

Capacity and Production for the Year ended on June 2005

Clinker Production Cement Production Cement Dispatches Metric Tons 1,295,655 1,408,400 1,420,369

Production is at full capacity due to increased demands locally and abroad

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SUPERIOR STRENGTH: The Compressive Strength is a very important quality factor of Cement. The Portland Cement achieves its maximum strength in 28 days. The Pakistan Standard PSS 2321983(R) & British Standard BS 12 : 1978 provides for 28 days strength of 5,000 Psi and 5,950 Psi respectively for mortar cubes. As compared to this Lucky Cement has a 28 days compressive strength of more than 7,000 Psi to bear heavy loads. OPTIMUM SETTING TIME: Optimal initial & final setting times are ensured by adopting special production parameters using most modern control techniques. SOUNDNESS: By using most modern Kiln feeding system, it is ensured that lime entering into the Kiln should be in such a proportion that it should totally combine with oxides during the burning process. The result is that the free lime content is very low and soundness of Lucky cement is less than 1 mm which is far better than 10 mm prescribed by Pakistan Standard PSS 2321983(R) and / or British Standard BS 12 : 1978. CEMENT EXPORTS: The Lucky Cement has exported 277,268 Tons cement during the financial year ended on 30th June, 2005 with a share of 17.7% in the total exports of Pakistan. This shows a growth of 137% over the exports made by the company during last the preceding financial year. Aggressive marketing and entrepreneurial thinking has made the Company a leading exporter of cement from Pakistan. The Company has already made its strong existence in Afghanistan and in other countries in the Middle East. The Company is striving hard to increase its exports to Middle East, Bangladesh and other neighboring countries.

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Plant Information:
The plant has been set-up in Pezu which is an under developed area. This factor has generated employment opportunities in that area which is further helpful in improving and strengthening the economic situation of the country. The plant is being managed by qualified and expert cement field specialists, with proper technology transfer to junior engineers and workman. Major emphasis is being given to ensure better quality of Cement through stringent quality control and to the training of plant personnel through senior management with proper and well planned training programs, to develop even high level of professionalism and dedication to respective jobs. The 1.26 million tpa plant's major features are listed below :
Control System Process Type Environmental Impact Distributed control system along with Programmable Logic Controllers (PLCs.) Dry process Negligible dust emission limited up to Nm 100 mg /

The Company successfully completed up gradations and modernizations program in early 2001 after more than 2 years of continuous efforts. As a result the production capability of each line was increased to almost 2400 tons of clinker per day as against the original minimum designed capacity of 2000 tons per day. Simultaneous improvement in the production capability of raw mill and cement mill was also made to feed and to grind the increased clinker production capability.

Coal Firing System

The first brand new Coal Firing System in a cement plant in the country was also commissioned at Lucky Cement, situated in NWFP. The plant is on 100% coal. It is understood that on the basis of 100% capacity utilization, the switchover to coal by the company will save the country foreign exchange worth US$ 15 million per year which would have been otherwise spent on the import of furnace oil. The system installed and commissioned at Lucky Cement Ltd includes brand new and modern equipments like Crusher, Stacker, Reclaimer and Vertical Roller Mill imported from a renowned equipment supplier from China namely M/s. Hefei Cement Research & Design Institute, China and Dosing & Firing System imported from world renowned supplier of equipment for cement industry M/s. F.L. Smidth A/S, Denmark.

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Equipment Supplied under License from European Manufacturers

Roller Mill Electrostatic Precipitators Air Lifts Weighing Feeders Silo Aeration System Cement Packers High Temp. Fans O-Sepa Separotor Grate Cooler Bag Filter Bucket Elevator Pfieffer, Germany Lurgi, Germany Polysius, Germany Schenck, Germany Polysius, Germany Haver & Bocker, Germany Davidson, U.K. Onada, Japan Fuller, U.S.A Fuller, U.S.A Moiler, Germany

Equipment supplied directly from European Countries

Roller Press Clinker Conveyor Mills Gear Boxes Fuel Oil System Coal Firing System X-Ray Analyzer D.C.S. P.L.C.s KHD, Germany Aumund, Germany Flender, Germany Pillard, France FLS, Denmark Rigaku, Japan Foxbro-U.S.A Modicon-U.S.A

Power Supply

A 36.72 MW Power plant, Setup in Pezu to supply uninterruptible power to Lucky Cement

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Future Prospects for Lucky Cement

Lucky Cement is planning to expand the capacity of its plant at Pezu in Bannu Division of NWFP by installing two new lines. They are also building a Green Field Plant consisting of two lines which will be able to produce a total of 8400 tons of cement of different types and grades per day.

Progress in Expansion Plan

Lucky cement had two lines before June 2004: Line A Line B Each has an approximate capacity of 2,400 metric tons. Lucky Cements management foresaw that the demand for cement will be increasing, a view to which none of the other competitors agreed at that time. Hence, Lucky Cement decided to expand its production capacity and plant to cater to the local needs as well as the demand identified abroad. The expansion plan was implemented quite rapidly. By July 2005, they had installed a new plant with a capacity of 4,200 metric tons per day. During November 2005, the same capacity was doubled and named line D. Basically, up to this point, all the lines were located at Pezu, NWFP. They are intended to fulfill the local demand and the demands across the border in Afghanistan. Fortunately for Lucky Cement, more demand was identified in other countries, such as Africa, Bangladesh, Dubai, Kuwait and other regions in the Middle East. As a result, yet another plant with a capacity of 8,400 was installed at Super Highway, Karachi, Sind. This plant will be utilized mainly for export purpose. Therefore, by March 2006, Lucky Cements production will be a total of 22,000 metric tons. Uptil now the civil work on the new projects is progressing well. The imported equipments have been received at both Plant sites. The erection of the first new line at Pezu was completed during the year and equipments have also started operation. All new lines are expected to be custom-built during 2006 according to the progress of erection and commissioning. Hence this rapidly growing cement company aims to be the largest plant all over Asia by 2006. The finance manager at Lucky Cement proudly states that Today Lucky Cement is approximately 1 and a half years ahead of its competitors in Pakistan; It was able to predict a growing demand that no other local cement company had foreseen. Lucky Cement was indeed quite lucky in this case.

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Summary of Projected Capital Outlay for Remaining Line at Karachi & Pezu
1. Existing Site at Pezu Cement Plant 2. New Project at Karachi Cement Plant Power Generation Plant Rs.5.50 billion Rs.1.20 billion Total Rs.3.00 billion

Rs.6.70billion Rs.9.70 billion

Total Existing Production Capacity:

Tons per day

Line A2400 Line B2400 Line C4200 9000

Purpose of Our Report:

Every company has to make investment decisions. Whether it involves constructing a building or acquiring a patent for a product, investment decisions are crucial for a firms existence. Companies are always looking for real assets that are worth more than they cost. If the real assets value today exceeds the value of investment required, then the investment decision should be taken up. Various methods may be used to assess an investment plans feasibility. Amongst these are calculating the Net Preset value, Internal rate of return and the Payback period of the investment. Lucky Cement increased its production capacity by adding a 4200 tpd production plant and named it Line C. Our report aims to analyze this investment decision taken up by Lucky Cement. By looking at the resulting NPV, IRR and Payback Period, we will suggest Lucky Cement whether or not to go forward with its future investment decision to expand further by building similar 4200 tpd plants for Lines D and E.

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Analysis of the Expansion Plan

Reasons for expansion
The reasons for Lucky Cements expansion plan are summarized as follows: Increasing demands identified Since there is an increasing demand for cement locally and internationally, the expansion seemed like a necessary investment which is bound to give fruitful returns. According to analysts, demand for cement is expected to increase by 10-15% per annum. Reconstruction in northern areas of Pakistan after to the unfortunate earthquake event and in Afghanistan after the U.S invasion led to a sudden rise in the need for cement. In addition to this there are other probable future plans for construction, for instance the building of dams in Pakistan (e.g the Kalabagh Dam) which will also require huge supplies of cement. Suppose the dam is built, the overall market demand will increase from Rs.1 million to Rs.1.50 million. Inadequate supply of Cement in the Market Despite the fact that Lucky cement was operating at 90% capacity, there were still inadequate supplies of cement in the targeted markets. Hence it was felt that a new plant was crucial to increase production, since current capacity was not enough. Economies of Scale. As Lucky cement increases the size of its production capacity, various benefits will be realized due to economies of scale. Managerial economies, that is sharing top level management, office management and financial control is one for them. Also, growth leads to decreases in per unit fixed costs as the production is increased, increased efficiencies and enhanced profits. Technical economies will arise since the capital costs and operating costs do not rise in proportion to the size of the plant. Finally, lucky cement will have the advantage of Financial economies since being a large company with large assets to offer as security, it will be able to get loans from banks easily at better rates. Lucky Cement will also find transportation and purchases of raw Materials and components much more cost effective.
Continued

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Gain Market Share With the expansion, Lucky Cement aims to gain a larger share of the local and also possibly the international market. This way it will achieve more sales and increasing profits as compared to its competitors.

Flexibility Along with economies of scale, Lucky cement is also able to benefit from the expansion by being more flexible. It can increase/decrease its production according to sudden changes in demand.

Experience With a lot of past experience in cement production inefficiencies are minimized. Similar equipment, machinery, work procedures and skills will be required. Since Lucky Cement has been in the business for a long time now, it has an edge over other local cement companies.

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Issues Relating to the Expansion

While examining the economics of the expansion plan, the following factors were considered: a) Type of fuel Since we have large deposits of coal available locally, Lucky cement has recently switched from using oil furnace (Petrol) to Coal to generate fuel. This will save the country foreign exchange worth US$ 15 million per year which would have been otherwise spent on the import of furnace oil Lucky Cements coal requirement is approximately 800 ton /day. Local coal contains Sulphur deposits which are harmful for the Plant, unlike imported coal which is free from Sulphur. As a result Lucky Cement imports coal and uses both local and imported coal for fuel. On an average coal prices are expected to rise at 10% Pa. Conversion from petrol to coal: Furnace: Rs.22,700/ ton Coal: Rs.7000/ton b) Infrastructure and Location Sufficient infrastructure facilities were already available at the Pezu district and the location is quite suitable to cater to the local needs and its neighboring countries such as Afghanistan. The new Plant set up in Karachi will however primarily be for the purpose of exporting abroad. c) Seasonal Industry The industry demand is seasonal. Its season starts in February and ends in November, its peak season being between March and September. The production is reduced during winter due to lesser construction and hence lower demand for cement. d) Import of Plant The plant is custom-made according to Lucky Cements requirements. To be more cost efficient, the body is imported from China and the engine is from Europe. Lucky Cement received tax savings and lower duties for the import of the Plant.

Continued

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e) Environmental aspects Lucky cements activities follow all required environmental control regulations. f) Interest charges Lucky Cement has taken loans worth Rs.7.4 billion. Recent loan taken by lucky cement is @ 10% because of IRS- Interest Rate Swap. And at the other end they had taken loans years ago at interest rates as low as 4% which they plan on paying back as soon as income is generated to avoid any additional interest costs. Since Lucky Cement has a high credit rating, it does not want to risk its reputation and credibility by defaulting. g) Tax Charges Lucky Cement pays 15% sales tax and 10% income tax on its investment cost. The Tax charges will be capitalized along with the investment cost.

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C a pita l B udg e ting To o ls A pplie d

Year 0 In i ti a l C o s t C o st o f P la n t L an din g C o st T ra n sp o r t a t io n C o st C o st o f In st a lla t io n 1 In s ta l l e d C o s t Fu e l C o n s u m pt i o n 2C o s t M a i n te n a n ce S p a r e s 5 C o s t
0 O p e r a ti o n a n d M a i n te n a n c e 1L a bo u r

Ye ar 1 R s.

Ye ar 2 R s.

Ye ar 3 R s.

Year 4 R s.

Year 5 R s.

Year 6 R s.

Year 7 R s.

Year 8 R s.

Year 9 R s.

Ye ar 10 R s.

R s. 2 ,0 0 0 ,0 0 0 ,0 0 0 6 5 6 ,5 0 0 ,0 0 0 3 ,5 0 0 ,0 0 0 5 0 0 ,0 0 0 ,0 0 0 3 ,1 6 0 ,0 0 0 ,0 0 0

7 9 0 ,0 0 0 ,0 0 0 8 6 9 ,0 0 0 ,0 0 0 9 5 5 ,9 0 0 ,0 0 01 ,0 5 1 ,4 9 0 ,0 010,1 5 6 ,6 3 9 ,0 010,2 7 2 ,3 0 2 ,9 010,3 9 9 ,5 3 3 ,1 910,5 3 9 ,4 8 6 ,5 019,6 9 3 ,4 3 5 ,1 610,8 6 2 ,7 7 8 ,6 7 1 ,0 0 0 ,0 0 0 5 8 7 ,0 0 0 1 ,0 5 0 ,0 0 0 6 3 3 ,9 6 0 1 ,1 0 2 ,5 0 0 6 8 4 ,6 7 7 1 ,1 5 7 ,6 2 5 7 3 9 ,4 5 1 1 ,2 1 5 ,5 0 6 7 9 8 ,6 0 7 1 ,2 7 6 ,2 8 2 8 6 2 ,4 9 6 1 ,3 4 0 ,0 9 6 9 3 1 ,4 9 5 1 ,4 0 7 ,1 0 0 1 ,0 0 6 ,0 1 5 1 ,4 7 7 ,4 5 5 1 ,0 8 6 ,4 9 6 1 ,5 5 1 ,3 2 8 1 ,1 7 3 ,4 1 6

Fi n a n ci a l C o s t: L o a n In s ta l l m e n t 1 In te r e s t ( O n In s ta l l e d 1C o s t)
2 In s u r a n c e Ex p e1n s e

2 0 0 ,0 0 0 ,0 0 0 2 0 0 ,0 0 0 ,0 0 0 2 0 0 ,0 0 0 ,0 0 0 2 0 0 ,0 0 0 ,0 0 0 2 0 0 ,0 0 0 ,0 0 0 2 0 0 ,0 0 0 ,0 0 0 2 0 0 ,0 0 0 ,0 0 0 2 0 0 ,0 0 0 ,0 0 0 2 0 0 ,0 0 0 ,0 0 0 2 0 0 ,0 0 0 ,0 0 0 9 ,9 5 4 ,0 0 0 9 ,9 5 4 ,0 0 0 9 ,9 5 4 ,0 0 0 9 ,9 5 4 ,0 0 0 9 ,9 5 4 ,0 0 0 9 ,9 5 4 ,0 0 0 9 ,9 5 4 ,0 0 0 9 ,9 5 4 ,0 0 0 9 ,9 5 4 ,0 0 0 9 ,9 5 4 ,0 0 0

2 0 ,0 0 0 ,0 0 0 2 0 ,0 0 0 ,0 0 0 2 0 ,0 0 0 ,0 0 0 2 0 ,0 0 0 ,0 0 0 2 0 ,0 0 0 ,0 0 0 2 0 ,0 0 0 ,0 0 0 2 0 ,0 0 0 ,0 0 0 2 0 ,0 0 0 ,0 0 0 2 0 ,0 0 0 ,0 0 0 2 0 ,0 0 0 ,0 0 0

To t a l Ex p e n d i tu r e

1 ,0 2 1 ,5 4 1 ,0 010,1 0 0 ,6 3 7 ,9 610,1 8 7 ,6 4 1 ,1 717,2 8 3 ,3 4 1 ,0 716,3 8 8 ,6 0 7 ,1 113,5 0 4 ,3 9 5 ,6 717,6 3 1 ,7 5 8 ,7 811,7 7 1 ,8 5 3 ,6 214,9 2 5 ,9 5 3 ,1 121,0 9 5 ,4 5 7 ,4 2

C alc u latio n o f N P V, IR R and P aybac k pe rio d :

Year 0 A ft e r Ta x s a vi n g s A dd : D e p r e c i a t i o n C a s h fl o w p e r y e a r ye ar 1 Ye ar 2 Ye ar 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Ye ar 10

3 8 0 ,0 0 0 ,0 0 0 4 3 7 ,0 0 0 ,0 0 0 5 0 2 ,5 5 0 ,0 0 0 5 7 7 ,9 3 2 ,5 0 0 6 6 4 ,6 2 2 ,3 7 5 7 6 4 ,3 1 5 ,7 3 1 8 7 8 ,9 6 3 ,0 9 11 ,0 1 0 ,8 0 7 ,5 515,1 6 2 ,4 2 8 ,6 818,3 3 6 ,7 9 2 ,9 9

3 1 6 ,0 0 0 ,0 0 0 3 1 6 ,0 0 0 ,0 0 0 3 1 6 ,0 0 0 ,0 0 0 3 1 6 ,0 0 0 ,0 0 0 3 1 6 ,0 0 0 ,0 0 0 3 1 6 ,0 0 0 ,0 0 0 3 1 6 ,0 0 0 ,0 0 0 3 1 6 ,0 0 0 ,0 0 0 3 1 6 ,0 0 0 ,0 0 0 3 1 6 ,0 0 0 ,0 0 0

-3 ,1 6 0 ,0 0 0 ,0 0 0 6 9 6 ,0 0 0 ,0 0 0 7 5 3 ,0 0 0 ,0 0 0 8 1 8 ,5 5 0 ,0 0 0 8 9 3 ,9 3 2 ,5 0 0 9 8 0 ,6 2 2 ,3 7 51 ,0 8 0 ,3 1 5 ,7 311,1 9 4 ,9 6 3 ,0 911,3 2 6 ,8 0 7 ,5 515,4 7 8 ,4 2 8 ,6 818,6 5 2 ,7 9 2 ,9 9

3 N P V @ 8 1%

3 ,4 2 9 ,8 9 2 ,5 9 4 .0 2 26% 5 y r s a pp r o x

IR R P a y ba ck P e ri o d

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Calculations of NPV, IRR & Payback Period

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Assumptions underlying calculation of NPV and IRR:

1. For the Calculation of Installed Cost, the dollar rate is assumed to be Rs.59 and the same rate is assumed for spare parts for the life of the plant. 2. Fuel consumption cost is based on the consumption of coal units and is calculated @ Rs.7000 per metric ton, 10% p.a. change in price of coal is assumed.

3. The Maintenance spares cost is assumed to increase at an annual rate of 5% while the rupee-dollar parity is assumed to be same @ Rs.59 per US $. As the installed plant is new so minimum maintenance cost is taken for the first year. 4. The cost of operation and maintenance labor is assumed to increase at an annual rate of 8% p.a. *(inflation rate taken as base ) 5. The average interest on loan is fixed @ 10% p.a. based on interest rate swap, 6-mth KIBOR is taken as the benchmark. 6. The opportunity Cost of capital for Lucky cement Ltd is identified to be 8%. 7. Depreciation for the plant is calculated on the basis of unit production method and 1,124,000 metric tons is taken as the estimated useful life. 8. The insurance estimate is based on straight line method on the installed cost with no salvage value for a 10 year period. The Insurance estimated is that of a normal fire policy covering damage, malicious damage, explosion, impact damage, aircraft damage and earthquake fire and shock. Working for insurance is shown below:

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Installed Cost = 3,160,000,000 Per year Allocation @ 10% of the Installed Cost Insurance charges are as follows: Fire Premium = 3% A.S.C. 5% Sub Total F.I.F. 1% C.E.D. 3% Net Premium

316,000,000 9,480,000 474,000 9,954,000 4,740 298,620 10,257,380

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Capital Budgeting
The Capital budgeting tools have been appropriately applied to analyze the investment made by Lucky Cement and the calculations are based on the projected of cash flows for 10 years. The Net Present Value (NPV), which amounts to Rs.3429.9 million, is calculated by discounting cash flows at an opportunity cost of 8%. Whereas the Internal Rate of Return (IRR) is calculated to be 26%. Finally, the payback period was also calculated and it amounts to approximately 5 years. Huge NPV positive amount will add value to the shareholders wealth thus achieving the objective of the company while the IRR also seems to be attractive and the payback period of around 5 years is a reasonable tenor, so by all means the companys decision of plant expansion sounds favorable according to our analysis.

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