PROJECT

APPRAISAL

REPORT ON

WAREHOUSE

BY AB LTD

NAME – AMIT BAHUGUNA ROLL NO – 55 MBA (PT) 2011-14

1

TABLE OF CONTENTS

EXECUTIVE SUMMARY….…………………………………………………………… .. 2 CHAPTER I OVERVIEW OF THE INDUSTRY & COMPANY....… ............... 3 CHAPTER II STATEMENT OF PROBLEM …………………………....... ........ 8

CHAPTER III COMPUTATION OF CASH OUTFLOW AND INFLOW ......... 13

TABLE – 1 ......................................................................................... 14

TABLE – 2 ......................................................................................... 15

TABLE – 3 ......................................................................................... 16

TABLE – 4 ......................................................................................... 17

TABLE – 5 ......................................................................................... 18

TABLE – A ........................................................................................19

TABLE – B ........................................................................................20

TABLE – C ........................................................................................21

TABLE – D ........................................................................................22

TABLE – E ........................................................................................23

TABLE – F........................................................................................ 24

TABLE – IIA ..................................................................................... 25

TABLE – IIB .....................................................................................26

TABLE – 6 ......................................................................................... 28 CHAPTER IV BASIS OF COMPUTATION .... …………………………… .......... 29

CHAPTER V INVESTMENT APPRAISAL................................…………. ......... 32

CHAPTER VI CONCLUSION .................................................................................. 38

REFERENCES………………………………………………………………………. ......... 41

2

EXECUTIVE SUMMARY

With a wide gap of availability and demand of warehousing space in the logistics sector, the

leading financial – industrial experts are predicting tremendous opportunities for investment

in several initiatives and projects which are underway to boost development of state-of-the-

art warehouses to cater the demand of producers, exporters and importers.

Various studies conducted by leading consultants in the subject have identified the locations

where warehousing activities are going to flourish. Few among them are in and around

Bangalore, Chennai, Rewari, Mumbai, Nasik and along the major rail-road routes passing

through the length and breadth of the country. The golden quadrilateral road network,

Dedicated Freight Corridor from east to west which has been planned to be developed by the

Indian Railways is considered to be good for establishing such infrastructure. Already all

major players like Concor, Adani‘s, CWC, Shubham logistics etc. have advanced their plans

to put up big warehousing capacities at these locations.

Chander, a satellite town of Jaipur is quite close to the Western Freight Corridor and is found

to be an ideal location for setting up of a warehouse. A big chunk of land measuring 80000

sq.m is purchased wherein the capacities can be built up in one or more phases. Initially

10000 sq.m covered area warehouse with state-of-art infrastructure facilities is planned.

In this project we have worked out the most economical Cash outflow i.e. investment of the

project with an optimum time frame of 12 months. The fixed cost and variable cost have been

worked out separately. On the basis of past financial experiences of the company, the

occupancy level, tariff, expenditure and income have been estimated. Future projections with

regard to income and expenditure have been considered keeping in mind the inflation and

future demand so that the study matches the actual.

The cost of the project and income generation has been tested with various financial tools to

evaluate a perfect and sound venture. The various parameters that have been used are - Pay- back period, Accounting rate of return (ARR), Net Present Value (NPV) and Internal rate of return (IRR). Using these investment appraisal techniques the financial feasibility of the project has been found out.

3

CHAPTER I

OVERVIEW OF THE INDUSTRY AND THE COMPANY

Indian logistics market

The overall logistics market in India currently stands at about $ 50 billion and is growing at a

rate of 7 per cent annually on the back of the country's economic boom. The main drivers that

will fuel the growth in the logistics market include the upcoming freight corridor project,

building of logistics hubs and warehouses, port development, technology up gradation,

investment by private players and also the impending industry status for the logistics sector.

The enormous business potential of India's domestic market, with a growing middle-class,

will also drive the uptrend in logistics demand.

Talking on the future of the logistics market, the logistics market in India is poised for a fast

growth in the next ten years but the domestic logistics services providers need to embrace the

latest technology to keep pace with their overseas counterparts. IT will play a significant role

in the growth of logistics sector and facilitate consolidation.

Most of the domestic players in the logistics sector are reluctant to adopt the latest technology

available in the country. With the conferring of the industry status on the logistics sector, the

logistics cost would come down to 11 per cent of the country's GDP. The cost reduction

would help the sector to enhance its competitiveness in global trade. Although the sector is

growing in value as well as in volume terms leading to sustainable opportunities in the

logistics space, India's logistics cost is among the highest in the world at almost 13 per cent of

its GDP. Logistics costs in India are estimated at over Rs 4.5 trillion, growing at a

compounded annual growth rate (CAGR) of 8-12 percent. The high logistics costsis attributed

to the highly fragmented Indian logistics market with small local players dominating the

supply chain landscape. The industry status for the logistics sector would lead to

consolidation and also bring in large, organized global players to the domestic market.

At present only 15 percent of the domestic logistics providers are in the organised sector. Once the sector is accorded the industry status, the domestic market will witness more

4

organised players, especially the global players, thereby enhancing competition and cutting

logistics costs. The industry status for logistics sector would enable the existing organised

players in the logistics business to cater to a wider client base and become cost effective .

Apart from the availability of land and the requisite infrastructure, industry status for the

logistics sector also means that the logistics services providers can avail greater loans as the

borrowing rates will come down.

Small firms are often caught in a bind because they lack bargaining power to negotiate costs,

which in turn puts a squeeze on profits thereby restricting their ability to invest in capacity-

building. Bigger logistics companies on the other hand have more resources to upgrade

network capabilities, systems and invest in people, thereby offering more cost-effective and

efficient services.

General assessment of demand Industries such as FMCG, pharma and food processing apart from agriculture sector have considerable requirements for integrated warehouses owing to their higher need for warehousing activity. These industries are the leading contributors in the 25.7 per cent share

accounted by warehousing segment within the total Indian logistics market.

Meanwhile, both manufacturers and logistics companies are hampered by the problem of

poor infrastructure connectivity in rural areas. The hardest hit by the inadequate transport

connectivity are likely to be the FMCG, food processing, pharma and consumer durables

industries, which have a huge potential consumer base in these areas. The FMCG and food

processing industry are also affected on the sourcing side, since they are highly dependent on

the raw materials sourced from rural areas.

Apart from development of dedicated railway freight corridors, focused development of

inland waterways and the strengthening of road networks through the national highway

development program are expected to improve the market reach of most industries.

Owing to these efforts, professional logistics services can be extended up to rural areas,

leading to a higher scale of logistics activities outsourcing.

5

As India's retail sector opens up on a huge scale, domestic logistics companies are planning

significant investments to expand their portfolio of services. It is expected that in the next

two years, the logistics sector will have undergone major changes, offering a wide spectrum

of services.

Consider this: Global retail giant Wal-Mart announces its entry into India through a joint

venture with Bharti. Reliance puts on its drawing board a mega plan of Rs 25,000-crore to

create 100 million sq ft of retail space. The Aditya Birla group makes a retail foray with plans

to invest Rs 15,000 crore. The Tatas plan to participate in the retail race with renewed vigour.

Pantaloon plans to create a retail space of 30 million sq ft by 2009-10. Shoppers Stop may

have 6 million sq ft of retail space by the same time. Global retailers from the US, European

Union and Australia are all eyeing the retail revolution in India.

On the growth path

Indian players in the logistics space are keenly tracking these developments, as they suddenly

find their services in big demand. Although some retailers, like Reliance, may have their own

logistics subsidiaries, most of the others are working with third-party providers. The Indian

logistics sector is at the beginning of a strong growth path. Not only retail, there are other

growth drivers like the manufacturing, FMCG and auto components sectors.

Players in the segment are, indeed, ramping up their capital expenditure programme.

Edelweiss estimates that the six major players in this sector — Concor, Gateway Distriparks

Ltd (GDL), Allcargo, SICAL, Transport Corporation of India and Gati — will spend Rs

3,400 crore over the next three years to cash in on the growth opportunities. These companies

together invested about Rs 500 crore in the last fiscal.

The companies plan to expand their service portfolios. For example, Concor and SICAL's

future growth area is cold chain logistics, GDL and SICAL's is container train operations,

while TCI and Gati's is warehousing. Other trucking and courier companies are leveraging on

their networks to offer express and supply chain distribution solutions, apart from developing

expertise in 3PL (third-party logistics) services.

6

Absorbing investments

The different sectors within the logistics segment are also poised to absorb significant

investments. Edelweiss estimates that the container train sector (thrown open to private sector

recently) will see a capital expenditure of Rs 1,600 crore in the next three years, while

warehousing will get Rs 200 crore, trucking/XPS Rs 380 crore and offshore logistics Rs 250

crore.

Worldwide, the logistics industry is on a growth path, with the global logistics industry

estimated to be of the size of $3.5 trillion in 2005 — the US market alone was estimated at

$900 billion, almost 25 per cent of the global industry. In fact, about 60 per cent of the

Fortune 500 companies report having at least one contract with a 3PL company.

"India at present spends 13 per cent of its GDP on logistics, which is much higher than the

global average. This is due to inadequate infrastructure leading to periodic bottlenecks along

the routes. Another major reason is the regulatory loopholes, which raise the cost of service

and cause delays.

The biggest challenge The logistics companies at present provide services from transportation to warehousing and

inventory management. But, in the near future, they will have to expand their products basket

to include new value-added services, such as packaging, labelling and reverse logistics. The biggest challenge that faces these companies is that they should quickly imbibe latest

technologies, such as GPC/GIS tracking of consignments, and uncork new services to cater to

corporates seeking to outsource their logistics needs. Also, the Government should come out

with a sound policy that facilitates the operations of the logistics companies.

India's rising prominence in the manufacturing sector over the last few years has given a

fresh lease of life to the logistics market, and this trend is likely to gain pace with the wave of

global economic slowdown gradually receding and India emerging as one of the earliest

major economies to recover from downturn. This fast-paced growth of the industrial sector,

coupled with the more sturdy progress of the agricultural sector, has necessitated extensive

supply chains across the country to facilitate sourcing and distribution of production.

Distribution networks of most industries in India involve numerous retailers across the

country, and multiple levels of intermediaries. Since companies will be hard pressed to serve

such an intricate network, logistics service providers (LSPs) will fancy their chances of

finding a firm foothold in the Indian market. Apart from the steady expansion of operations

7

by large domestic industrial groups, an increasing number of global majors in industries

ranging from automotive and electronics to pharmaceuticals and cement have been targeting

a spot in the highly lucrative Indian market, says the analyst of this research. While foreign

companies need to engage logistics service providers since they are not conversant with the

culture, government policies, or distribution landscape of the country, domestic companies

are outsourcing their logistic activities to organized third-party logistics (3PLs) to focus on

their core competencies.

Most manufacturing industries such as automotive, cement, minerals, oil & gas, pharma, food

processing, and fast moving consumer goods (FMCG) need multimodal transportation

services as they have a widespread consumer base but limited production bases. Industries

such as FMCG, pharma, and food processing also have considerable requirements for

integrated logistics parks. Multimodal transportation solutions are becoming possible with the

development of inter-connected transportation infrastructure facilities, especially dedicated

freight corridors by the railways and improvements in coastal shipping facilities. Similarly,

the construction of massive state-of-the-art warehouses at key distribution hubs is helping to

meet the specialized warehousing needs of industries. These developments are encouraging

companies to outsource logistics functions. With a growth over 20 percent per annum over

the last 5 years, organised retailing is projected to reach US$ 30 Billion by 2014.

Company profile

The AB Ltd. is established with the main objective to provide scientific warehouse facilities

for the agricultural produce, in course of 60 years of its existence its mission has undergone a

change. Its mission is not only to provide warehousing facilities but also logistics service and

related activities with value added services to a multi clientele. It is emerging as a leading

market facilitator by providing integrated warehousing infrastructure and other logistic

services.

8

CHAPTER – II

STATEMENT OF PROBLEM

With almost touching double digit GDP growth in the last decade, India is venturing

into becoming a major economy which is comparable with US, China, Germany and

other developed countries.

One of the key sectors which is playing a significant role in driving the growth rate is

logistics, which includes transportation, warehousing, inventory control and

distribution. Big industrialists of the country are planning to enter this sector in a big

way in the shape of SEZ‘s (Special Economic Zones), FTWZ (Free Trade

Warehousing Zones), MMLP‘s (Multi Modal Logistics Park), logistics parks etc.

Already Reliance, Adani‘s, Tata realty, CONCOR (Container Corporation of India),

CWC have big plans.

Warehousing is one of the important parts of logistics

Government of India has decided to set up freight corridors from Dadri to Mumbai

(Western Freight Corridor) and Ludhiana to Calcutta (Eastern Freight Corridor). 50%

of the Western Freight Corridor will be passing through the state of Rajasthan. Along

the corridor big warehousing hubs are planned to facilitate speedy movement of

cargo.

Chander, a satellite town of Jaipur (situated 35 kms away) is near to the proposed

corridor. MNC‘s like Cargill, Walmart in association with Bharti and Indian retail

giants like Reliance, Big Bazar have strategic plans to set up distribution centres

(DC‘s) and logistics parks on the National Highway connecting Jaipur- Sikar-

Bikaner. They have acquired large chunks of land alongside the National Highway

touching Chander and beyond.

Besides agricultural produce there is demand for storage of agricultural inputs like

fertilizer and industrial goods. The changing face of Chander, the satellite town of

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Jaipur has become an attractive location for logistics companies, especially 3PL (3rd

Party Logistics) providers to develop logistics parks and modern scientific

warehouses. There appears to be huge demand for new generation warehouses to be

named as Distribution Centres (DC‘s) with multi level racking system for storage of

export- import goods, retail goods of FMCG (Fast Moving Consumer Goods) with a

full proof Computerised inventory control system to locate the cargo like WMS

(Warehouse Management Systems) and AS&RS (Automatic Storage and Retrieval

System).

Chander is emerging as a tier II city with the arrival of medium and large scale

industries, agriculture revolution and land area connecting to the industrial hubs of

Delhi, Punjab, Haryana to the Gateway ports, there appears to be tremendous

potential for industrial warehousing to cater the growing demand of the area.

Major industrial players like automobile industries, electronic industries, consumer

goods industries are in the process of establishing their mother warehouses in and

around Jaipur to boost up their growth plans.

Big retail giants like Reliance, Walmart in association with Bharti, Future Group,

L.G, Samsung etc. are planning to expand their distribution in and around Jaipur for

which they require storage space and since constructing their own warehouse would

cost very high therefore these retails giants outsource warehousing facilities.

The lifestyle of cities like Jaipur, Udaipur, Jodhpur and Kota are changing and socio-

economic development is also taking place. Consumer preferences are also changing

and more and more people are switching over to big brands thereby increasing the

demand for retail and FMCG goods.

Also warehousing with multi racking facilities are hardly available around Jaipur.

3PL and 4PL players are also looking for such facilities in and around Jaipur. Other

players like L.G., Samsung, Haier are looking for distribution centres with racking

system on Jaipur- Sikar- Bikaner National Highway. HUL is also expanding its

market operations beyond Jaipur city. They are looking for space with total logistic

support.

10

Nearly 55 percent of Delhi Mumbai Industrial Corridor is passing through the state of

Rajasthan and opportunities for industrial and infrastructure development are plenty.

Already many private entrepreneurs have envisaged plans to develop logistics hubs

alongside the Delhi – Mumbai Industrial Corridor and are investing billion of rupees

on developing infrastructure and logistics hubs.

It is high time for AB Ltd. to encash upon the market opportunities and develop

distribution logistics hubs to provide integrated, sophisticated set of transportation,

warehousing and distribution facilities that provide access to the market place.

Warehouse infrastructure availability is still not upto the mark in India especially in

the state of Rajasthan. The country lacks quality warehouses which can be compared

to old class in their area, facilities etc. Availability of modern warehouses with A

class infrastructure and racking system is scarce. There is strong need to develop

good Distribution Centres of huge capacity which can be operated as a multi client

shared facility to optimize warehousing cost.

There is clear need to utilise critical storage space to improve the space management.

Multi level racking system, alongwith automatic material handling equipment and

WMS (Warehouse Management System) can help to improve the space utilisation.

There is a need to develop New Generation Warehouses i.e. the state of art

warehouses with racking facilities, A class infrastructure, transportation facility and

integrated services. In other words total logistics support backed up with IT support to

meet the requirements of multi clients especially dealing in electronic goods, FMCG,

etc.

AB Ltd. has 80000 sq.m of land at Chander. It is situated on NH- 11 and is well

connected with rail and road. Already logistics companies / MNC‘s have developed

their own logistics hubs on this National Highway. Since valuable land is already

available at the vantage point, it is high time for the company to avail the market

opportunities and develop a New Generation Warehouse with IT support to provide

integrated services for multi clients.

Project details

A detailed report has been prepared to find out the cost of construction of an

Industrial Warehouse at Chander. The cost includes the cost of construction of

buildings, internal roads, electrification and steel racks. Cost of equipment and

revenue expenditure for each year has been calculated. After findingout the cost of

the project estimated income has also been calculated. To find out the

11

financial feasibility of the project capital budgeting tools such as pay-back period,

discounted cash flow, NPV, IRR and modified IRR have been calculated.

The total estimated investment in the project - 1765 lakhs (approx.) The revenue expenditure - Rs. 19,10,834 which increases at 12 percent per annum.

The estimated income - Rs. 2,67,81,600 which increases at 10 percent per annum. The project is planned to be financed from internal sources of the company.

Objective of the study The study is aimed to evaluate all the parameters involved in establishment of an industrial

warehouse and it has been carried out in stepwise fashion with one goal of designing a

financial model which gives maximum revenue generation to the company. Unlike in

manufacturing sector where various parameters are more or less defined to work out a

profitable venture, here for setting up of a warehouse we have to depend upon simple,,

traditional profit-loss concepts.

The following parameters have been analysed:

1. Determination of warehousing peak and lean demand

Methodology adopted: The data collected from multinational companies about their

future requirements, other prospective users who may use this facility at later stage,

the economic and general development of area.

2. Determination of peak and lean storage tariff

Methodology adopted: This has been worked out on the basis of data collected for the

available warehousing facilities in and around Chander, the prevailing storage tariff

charged by various operators and the present and future gap in the demand and supply

of availability of space.

3. Determination of the cost of the project

a. Fixed expenditure or capital expenditure

Land and construction cost

Proportionate cost of land will be added to the project and cost will be calculated on

12

the parameters of CPWD (Central Public Works Department), a premier construction

company and the prevailing costing methods. For e.g. Plinth area rates for buildings,

roads and ancillary buildings.

Equipment

External electrification

Steel racks

b. Revenue expenditure

Establishment cost

Yearly taxes

Insurance

4. To find out the financial feasibility of the project using investment appraisal methods

such as :

a. Pay- back period

b. Accounting Rate of Return (ARR)

c. Net Present Value (NPV)

d. Internal Rate of Return (IRR) Most of the public sector organisations adopt NPV/IRR method to assess the viability of the

project. The same method is also applied in the instant case.

13

CHAPTER – III

COMPUTATION OF CASH OUTFLOW AND INFLOW

DETAILS OF GODOWNS SIZE AND CAPACITY PLINTH AREA OF EACH GODOWN -- 125.00 m * 40.00 m = 5000 sq.m CARPET AREA OF EACH GODOWN -- 124.40 m * 39.20 m = 4876.48 sq.m

HEIGHT OF EACH GODOWN -- 7.00 m (Storage height)

12.00 m (Ridge height)

TOTAL AREA OF BOTH GODOWNS -- 10000 sq.m

COVERED PLATFORM AREA OF EACH GODOWN

FRONT SIDE -- 125 *2 = 250 sq.m

REAR SIDE -- 125 *2 = 250 sq.m

TOTAL COVERED PLATFORM AREA OF EACH GODOWN -- 500 sq.m

TOTAL OPEN SPACE -- 20040 sq.m

ROAD CONNECTIVITY FRONT MAIN ROAD -- 30.00 m WIDE

REAR SIDE ROAD -- 15.00 m WIDE

TIME OF COMPLETION DATE OF COMMENCEMENT -- 07.07.10

PERIOD OF COMPLETION -- 12 MONTHS

DATE OF COMPLETION -- 06.07.11

CONSTRUCTION AGENCY -- Central Warehousing Corporation (PSU)

PROJECT COST

TOTAL PROJECT COST -- Rs. 17,64,62,110 (as calculated in the following pages)

14

Table – 1

ESTIMATED COST OF CONSTRUCTION OF WAREHOUSES 10000 sq.m WITH NECESSARY ANCILLARIES AT CHANDER (RAJASTHAN)

1. Cost of land (Proportionate) Rs. 6,56,250.00

2. Cost of development of land i.e., leveling, drain, Rs. 25,00,000.00

etc

3. Cost of providing compound wall and gate (Table - A) Rs. 56,47,080.00

4. Cost of construction of warehouse of PEB type for 10000 sq.m Rs. 6,62,41,875.00

capacity as per details as per Table – B

5. Cost of construction of ancillary buildings (as per details)

a) Office cum store block as per Table – C Rs. 24,16,247.00

b) Lavatory block as per Table – D Rs. 2,10,587.00

c) Guard room as per Table – E Rs. 1,54,036.00

6. Cost of providing internal roads as per details as per Rs. 3,09,61,800.00

Table- F

7. Cost of providing water supply arrangements Rs. 5,00,000.00

(lump sum)

8. Cost of providing external services and connections etc. (lump Rs. 5,00,000.00

sum)

9. Rain water harvesting (lump sum) Rs. 15,00,000.00

Rs. 11,12,87,875.00

Add 10% Departmental Charges Rs. 1,11,28,787.00

10. Fire fighting arrangements

Rs. 50,00,000.00

Total Rs. 12,74,16,662.00

15

Table – 2

COST OF EXTERNAL ELECTRIFICATION AT CHANDER (RAJASTHAN)

1. S/L Pole 25 @ Rs. 4500 Rs. 1,12,500.00

2. S/L Bulbs 250 W 25 @ Rs. 5200 Rs. 1,30,000.00

3. W.P Box 25 @ Rs. 500 Rs. 12,500.00

4. T.C of S/L 25 @ Rs. 300 Rs. 7,500.00

5. Cable 2 x 2.5 680 m @ Rs. 95 Rs. 64,600.00

6. Laying cable 680 m @ Rs. 35 Rs. 23,800.00

7. Panel board with 200 ATPN 1 JOB @ Rs. 18500 Rs. 18,500.00

bus back 63 ATPN 32 ATPN-

2-30A 5P MCB

8. G.I wire 700 m @ Rs. 5 per m Rs. 3,500.00

9. Earthing 2 x Rs 1078 each Rs. 2156.00

10. Electrical connection for electric Rs. 1,00,000.00

dept. (Lump sum)

11. High Mast (market rate) 2 x Rs. 650000 each Rs. 13,00,000.00

Rs. 17,75,056.00

Add : 3% contingencies on Rs. Rs. 50,251.68

16,75,056

Rs. 18,25,307.68

Add : 10% dept. charges Rs. 1,82,530.77

Total Rs. 20,07,838.45

Approx. Rs. 20,07,838.00

16

Table – 3

COST OF CONSTRUCTION OF STEEL RACKS FOR STORAGE PURPOSE AT CHANDER (RAJASTHAN)

Horizontal member 3 x 28.25 x 4 = 339.00 m

15 x 3 x 9.30 = 418.50 m

15 x 2 (1.76+1.76) = 105.60 m

Cross members 4 x 14 x 5.00 = 280.00 m 1143.10 m

Total weight (A) 35 x 2 x 1143.10 x 5.80 = 464098.60 kg

Side stags 2 x 15 x 4 x 4.83 = 579.60 m

Base @13 cm c/c 3 x 2 x 217 x 1.76 = 2291.52 m

2871.12 m

Total weight (B) 35 x 2 x 2871.12 x 3.50 = 703424.40 kg

Total weight (A+B) 11,67,523.00 @ 31.25 per kg. Rs. 3,64,85,093.75

(as per market rate

analysis)

Add: 3% contingencies Rs. 10,94,552.81

Rs. 3,75,79,646.56

Add : 10% Dept. charges Rs. 37,57,964.66

Rs. 4,13,37,610.00

(approx)

Angle Iron Main frame – 65 X 65 X 6 mm

Base & side stags – 40 X 40 X 6 mm

17

Table – 4

COST OF EQUIPMENT

1. Diesel generator set 125 KV Rs. 15,00,000.00

2. 80 Tonne capacity pit less computerised weigh bridge Rs. 25,00,000.00

3. Fork lift 2 Tonne capacity ( 2 no.) @ 5 lakh each Rs. 10,00,000.00

4. Platform scales and hand driven trolleys (lump sum) Rs. 2,00,000.00

5. Tubewell with water supply pipeline and underground tank Rs. 5,00,000.00

(lump sum)

Total Rs. 57,00,000.00

18

Table - 5

CALCULATION OF REVENUE EXPENDITURE

1. Establishment cost

One superintendent Rs. 40,000.00

One JTA/TA Rs. 35,000.00

2. Fringe benefits Rs. 25,000.00

3. 4 security guards @ Rs. 5000 each Rs. 20,000.00

4. RO/CO expenditure Rs. 8,000.00

5. Misc. Expenditure Rs. 10,000.00

Rs. 1,38,000.00 x 12

= Rs. 16,56,000.00

6. Insurance Re 1 per 1000 cost of building Rs. 1,27,417.00

7. Insurance Re 1 per 1000 cost of stock Rs. 1,27,417.00

Total Rs. 19,10,834.00

(It has been assumed that the cost of the goods stored will be equal to the cost of the building)

19

Table – A

COST OF PROVIDING COMPOUND WALL AND GATE AT CHANDER (RAJASTHAN)

1. Compound wall with stone masonry

Total length North 72m East 346m South 61m West 291m

770 m 770m @ 3000.00 Rs. 23,10,000.00

2. Steel Gate 10.5m @ 774.00 Rs. 8,127.00

(8-AR-97)

Rs. 23,18,127.00

Add : Cost Index (Table – IIA) @ 136.51% Rs. 31,64,475.17

Rs. 54,82,602.17

Add : Contingencies @ 3.00% Rs. 1,64,478.08

Rs. 56,47,080.25

Approx. 56,47,080.00

20

Table – B

COST OF WAREHOUSES 10000 SQ.M OF HEIGHT 7.00 M AT CHANDER (RAJASTHAN)

1. Total area of godown 10000 sq.m

2. Rate of warehouse having 7 m height with open covered

verandah @ Rs. 6125 per sq.m

3. Cost 10000 x 6125 Rs. 6,12,50,000

4. Add : 5% for internal electrification Rs. 30,62,500

Rs. 6,43,12,500

5. Add : 3% contingencies Rs. 19,29,375

Rs. 6,62,41,875

21

Table – C

COST OF CONSTRUCTION OF OFFICE CUM STORE BLOCK AT CHANDER (RAJASTHAN)

Rates are based on plinth area rates as per 1/92 CPWD

1. Main building portion300 sq.m x 2585.00 Rs. 7,78,500.00

2. Add extra due to strip foundation -

3. Add extra due to deeper foundation -

Add : 12.50% for internal electrification items on (a) Rs. 97,312.50

Add: 4%for internal water supply of sanitary installation on item Rs. 31,140.00

no. (a)

Add: 5% for external services on item no. (a) such as sever lines, Rs. 38,925.00

safety tanks etc.

Rs. 9,45,877.50

Add : Cost Index (Table IIB) @ 148.01% Rs. 13,99,993.28

Rs. 23,45,870.78

Add : Contingencies @ 3.00% Rs. 70,376.12

Rs. 24,16,246.90

Approx. 24,16,247.00

22

Table – D

COST OF CONSTRUCTION OF LAVATORY BLOCK (one unit) AT CHANDER (RAJASTHAN)

Rates are based on plinth area rates as per 1/92 CPWD

1. Main building 30.00 sq.m @ 2010.00 Rs. 60,300.00

2. Add : Lump sum for internal water supply installation Rs. 14,600.00

3. Add : 12.5% for internal electrification on item (a) Rs. 7,537.50

Rs. 82,437.50

Add : Cost Index (Table – IIB) @ 148.01% Rs. 1,22,015.75

Rs. 2,04,453.25

Add : Contingencies @ 3.00% Rs. 6,133.60

Rs. 2,10,586.85

Approx.

2,10,587.00

23

Table – E

COST OF CONSTRUCTION OF GUARD ROOM (one unit) AT CHANDER (RAJASTHAN)

Rates are based on plinth area rates as per 1/92 CPWD

1. Guard room + time office 30.00 sq.m @ 2010 Rs. 60,300.00

2. Add : Cost Index (Table – IIB) @ 148.01% Rs. 89,250.03

Rs. 1,49,550.03

Add : Contingencies @ 3.00% Rs. 4,486.50

Rs. 1,54,036.53

Approx.

1,54,036.00

24

Table – F

COST OF CONSTRUCTION OF INTERNAL ROADS AT CHANDER

(RAJASTHAN) WITH 12ʺ WBM BASE WITH 9ʺ CEMENT CONCRETE 1:2:4

Total road area

3 x 126 x 30 = 11340 sq.m

1 x 140 x 15 = 2100 sq.m

2 x 60 x 15 = 1800 sq.m

1 x 40 x 20 = 800 sq.m

16040 sq.m

+ open area 4000 sq.m

20040 sq.m

Internal roads 20040 sq.m @ 1500.00 Rs. 3,00,60,000

(Market rate)

Add : Contingencies @ 3% Rs. 9,01,800

Rs. 3,09,61,800

25

Table – IIA COST INDEX FOR CONSTRUCTION OF COMPOUND WALL

WITH STONE MASONRY AT CHANDER (RAJASTHAN) (PRELIMINARY ESTIMATES)

S.No. Description Unit Rate as per Weightage Market rate at Cost Index DSR site for material (5x6)/(4) including & notified rate of

carriage wages for labour

(1) (2) (3) (4) (5) (6) (7)

1. Cement Quintal 256.94 18.50 550.00 39.60

2. Stone aggregate

a) 40 mm Cum 404.46 2.00 900.00 4.45 b) 20 mm / 10mm Cum 426.45 2.50 1050.00 6.16

3. a) Coarse sand Cum 399.31 8.25 1200.00 24.79 b) Fine sand Cum 245.35 1.25 1000.00 5.09

4. Bricks class design 75 1000 1448.99 31.00 3000.00 64.18

5. Shuttering material (for 1 sq.m.)

a) Wall form panel (150 no.s) Each 1196.25 1400.00

b) Shoulder (0.50) Each 412.50 600.00

c) Bridge clips (1.50) Each 82.50 125.00

d) Single clips (0.70) Each 34.50 60.00

e) MS Tube (2.02) R/Mtr. 389.00 440.00

f) Nuts & bolts (32 no.s) Each 53.00 75.00

361.29 2.00 450.00 2.49

6. Lime Quintal 250.00 0.25 560.00 0.56

7. Primer & paint Litre 68.50 0.25 130.00 0.47

8. MS angles Quintal 1615.44 6.00 4100.00 15.23

9. Barbed wire weighing 9.30 kg per Quintal 2595.59 1.00 8000.00 3.08 100 m

10. Mason Each 120.00 6.25 300.00 15.63

11. Belder / coolie Each 93.00 13.75 250.00 36.96

12. Bhisti / Mate Each 99.40 4.00 250.00 10.06

13. Fitter / black smith / painter Each 120.00 1.90 300.00 4.75

14. White washer Per day 99.40 0.60 250.00 1.51 15. T & P

a) Mixer Per day 250.00 0.25 1000.00 1.00 b) Vibrator Per day 250.00 0.25 500.00 0.50

100.00 236.51

Net cost index : 136.51%

26

Table – IIB COST INDEX FOR ANCILLARY BUILDINGS AT CHANDER

(RAJASTHAN)

S.No. Description Unit Rate as per DSR Weightage Prevailing Cost including Market Rate Index carriage (5x6)/(4 )

(1) (2) (3) (4) (5) (6) (7)

1. Bricks 35 class designation 1000 1448.99 10.50 3000.00 21.74

2. Cement OPC Quintal 256.94 14.50 550.00 31.04

3. Steel Quintal 1630.44 19.50 4400.00 52.62

4. Aggregate 20 mm size Cum 426.45 7.00 1050.00 17.24

5. Sand (coarse sand) Cum 399.31 3.00 1200.00 9.02

6. Paint Litre 68.5 3.00 130.00 5.69 a) Synthetic enamel paint 50%

b) Dry distemper 50%

7. Ply and common wood Sq. M 224.44 5.00 900.00 20.05

a) 12 mm particle board 25%

b) 12 mm medium density fibre board 25 %

c) Steel window standard section 50%

8. Pipes Metre 53.92 2.50 155.00 7.19

a) 15 mm GI pipe 33.33%

b) 100 mm HCI pipes 33.33%

c) 20 mm black conduits 33.33%

9. Lamps & fans Each 366.50 3.50 990.00 9.45

a) Ceiling fans 48 50%

b) 1.20 m fluorescent fitting with single

tube 50%

10. Electrical machinery Each 24800.00 2.50 45000.00 4.54 a) Motors 7.5 HP (pump set) 1500 RPM

11. Wires and cables Metre 122.90 4.00 150.00 4.88 a) Wire ( 70% of 1.5 sq.mm & 30 % of 4.0

sq.mm ) 75%

b) Cables (30 sq.mm) 25%

12. Labour Each 106.50 25.00 275.00 64.55 a) Unskilled 50%

b) Skilled50%

100.00 248.01

Net cost index : 148.01%

27

CASH INFLOW

Estimated Income calculation

1. Proposed area of 2 godowns : 10000 sq.m

2. Occupancy : 85%

3. Storage charges @ Rs. 135 per sq.m per month

4. Estimated yearly income : 85% ( 10000) x 135 x 12 = Rs. 1,37,70,000 per year

5. Income from open area storage (50% of open space @ Rs. 90 per sq. m per month)

= 50% (20040) x 90 x 12 (yearly)

= Rs. 1,08,21,600 per year

6. Income from truck parking (avg. 20 trucks per day @ Rs. 100 per truck per day)

= 20 x 100 x 365

= Rs. 7,30,000 per year

7. Income from weigh bridge (Avg. 100 trucks per day @ Rs. 40 each)

= 100 x 365 x 40

= Rs. 14,60,000 per year

8. Income from pest control and fumigation (lump sum) = Rs. 5,00,000 per year

9. Total estimated income = 1,37,70,000 + 1,08,21,600 + 7,30,000 + 14,60,000

= Rs. 2,67,81,600

28

Table - 6

CALCULATION OF CASH FLOW

Building 127416662 1% Straight line

Equipment 5700000 5% WDV

Tax 36%

Year Income Expenditure PBDIT Dep. Dep. PBT Tax PAT Cash Flow

Building Equipment

0 -176462110

1 26781600.00 1910834.00 24870766.00 1274166.62 285000 23311599.38 8392175.78 14919423.60 16478590.22

2 29995392.00 2101917.40 27893474.60 1274166.62 270750 26348557.98 9485480.87 16863077.11 18407993.73

3 33594839.04 2312109.14 31282729.90 1274166.62 257212.5 29751350.78 10710486.28 19040864.50 20572243.62

4 37626219.72 2543320.05 35082899.67 1274166.62 244351.875 33564381.18 12083177.22 21481203.95 22999722.45

5 42141366.09 2797652.06 39343714.03 1274166.62 232134.2813 37837413.13 13621468.73 24215944.40 25722245.31

6 47198330.02 3077417.27 44120912.76 1274166.62 220527.5672 42626218.57 15345438.69 27280779.88 28775474.07

7 52862129.63 3385158.99 49476970.63 1274166.62 209501.1888 47993302.82 17277589.02 30715713.81 32199381.62

8 59205585.18 3723674.89 55481910.29 1274166.62 199026.1294 54008717.54 19443138.31 34565579.23 36038771.98

9 66310255.40 4096042.38 62214213.02 1274166.62 189074.8229 60750971.58 21870349.77 38880621.81 40343863.25

10 74267486.05 4505646.62 69761839.43 1274166.62 179621.0818 68308051.73 24590898.62 43717153.11 45170940.81

11 83179584.38 4956211.28 78223373.10 1274166.62 170640.0277 76778566.45 27640283.92 49138282.53 50583089.17

12 93161134.50 5451832.41 87709302.09 1274166.62 162108.0263 86273027.45 31058289.88 55214737.57 56651012.21

13 104340470.64 5997015.65 98343454.99 1274166.62 154002.625 96915285.75 34889502.87 62025782.88 63453952.12

14 116861327.12 6596717.21 110264609.91 1274166.62 146302.4937 108844140.79 39183890.68 69660250.11 71080719.22

15 130884686.37 7256388.94 123628297.44 1274166.62 138987.369 122215143.45 43997451.64 78217691.81 79630845.80

29

CHAPTER IV

BASIS OF COMPUTATION The following assumptions have been made while calculating the cash inflows and outflows:

1. Land cost has been considered at the acquisition / purchase price.

2. The cost of proportionate area has been taken into consideration i.e. out of the total

land area of 80000 sq.m at Chander, 35000 sq.m will be used for this project.

3. The calculation for the cost of construction for the various buildings, godowns has

been taken based on Delhi Schedule of Rates (DSR) of Central Public Works

Department (CPWD), a premier construction agency of the Government of India and

these rates have been brought to the level of Chander by appropriating the cost with

respective cost indexes. These cost indexes have been prepared incorporating the

prevailing market rates for construction material and labour.

A market rate certificate has been shown at the end of this chapter and is approved

by the assistant engineer.

4. The cost of equipment is based on prevailing market rate.

5. 3 % contingencies and 10% departmental charges have been added to the cost of

building, electrification and steel racks.

6. For the purpose of Insurance :

a. Building Insurance: Re 1 per 1000 cost of building.

b. Goods stored: Re 1 per 1000 cost of the goods.

It has been assumed that the cost of the goods stored is equivalent to the cost of

the building.

7. The storage cost is Rs. 135 per sq.m per month and it has been assumed that on an

average 85% of the storage space will be occupied. This assumption is based on the

data of already existing warehouses.

30

8. The rate of depreciation is as follows:

a. Building: Depreciation is charged at 1% per annum on straight line basis.

b. Equipment: Depreciation is charged at 5 % per annum on written down basis.

9. The tax rate applicable is 36 % including surcharge.

10. The time period for this project has been taken as 15 years so that the project of such

magnitude is viable even in case of slowdown of the economy and various other

factors.

11. It has been assumed that the income increases by 12% per annum and the expenditure

increases by 10% per annum. This is due to inflation and GDP growth. The salary and

wages increase by 4-5% as there is general increase in dearness. The inflation rate is

approximately 8 % on yearly average basis. Thus we have taken an increase of 10 %

in expenditure and to cover this increase in expenditure the tariff rates are revised in

such a manner that the income increases by 12% per annum.

12. The rate of return is 10 % as per the trend in warehousing business.

13. The reinvestment rate is 9% since the company is expected to reinvest its cash flows

at a higher rate of return because of recovery in markets and high inflation. The

government is expected to tighten interest rates.

The market rate certificate for material, labour and machine hiring is shown on the next page.

31

Rates of material and labour at Chander (Rajasthan)

MATERIAL

1. Sand Rs. 1200 per cum

2. 20 mm stone aggregate Rs. 1050 per cum

3. 10 mm stone aggregate Rs. 800 per cum

4. RR stones Rs. 750 per cum

5. Bricks class density 75 Rs. 3000 per 1000 no.s

6. Bricks class density 35 Rs. 3000 per 1000 no.s

7. Laterite stone Rs. 15 each

8. Stone aggregate 40 mm size Rs. 900 per cum

9. Stone aggregate for road work Rs. 750 per cum

10. Cement Rs. 550 per quintal

11. Bitumen Rs. 35897 per tonne

12. Reinforcement steel Rs. 44 per kg.

13. Structural steel Rs. 46 per kg.

14. Good earth Rs. 200 per cum

LABOUR

1. Mason Rs. 300 per day

2. Helper Rs. 250 per day

3. Coolie (female) Rs. 200 per day

4. Painter Rs. 250 per day

HIRE CHARGES

1. Concrete mixer Rs. 1000 per day

2. Vibrator Rs. 500 per day

3. Road roller Rs. 1500 per day

MARKET RATE CERTIFICATE

Certified that the market rates incorporated for the preparation of PR for

construction of 10000 sq.m warehouse at Chander, Rajasthan are verified with

the prevailing market rates of Chander and found correct.

ASSISTANT ENGINEER

32

CHAPTER – V

INVESTMENT APPRAISAL

The four techniques are as follows:

1. Pay-back period

2. Accounting rate of return

3. Net Present Value

4. Internal rate of return

Pay- back period It favours projects which generate substantial cash inflows in the earlier years. Now, if risk

tends to increase with futurity – in general, this may be true – the pay back criterion may be

helpful in weeding out risky projects. The limitation of pay-back period is that it does not

consider time value of money and it also ignores cash flows beyond the pay-back period.

33

Cumulative Cash

Year Cash Flow Flows

-

0 176462110 -176462110

1 16478590.2 -159983519.8

2 18407993.7 -141575526.1

3 20572243.6 -121003282.4

4

22999722.5

-98003559.98

5 25722245.3 -72281314.68

6 28775474.1 -43505840.61

7 32199381.6 -11306458.99

8 36038772 24732312.99

The above table shows that for this project the pay-back period lies between 7-8 years.

Accounting Rate of Return (ARR) The accounting rate of return, also called the average rate of return is defined as

Profit after tax (PAT)

Book value of the investment The higher the accounting rate of return, the better the project. Projects which have an ARR

equal to or greater than a pre specified cut-off rate of return – which is usually between 20

percent and 30 percent – are accepted; others are rejected.

34

Year

Dep. Building

Dep. Equipment

PAT

Book Value

0 176462110.00

1 1274166.62 285000 14919423.60 174902943.38

2 1274166.62 270750 16863077.11 173358026.76

3 1274166.62 257212.5 19040864.50 171826647.64

4 1274166.62 244351.875 21481203.95 170308129.15

5

1274166.62

232134.2813

24215944.40

168801828.24

6 1274166.62 220527.5672 27280779.88 167307134.06

7 1274166.62 209501.1888 30715713.81 165823466.25

8 1274166.62 199026.1294 34565579.23 164350273.50

9 1274166.62 189074.8229 38880621.81 162887032.06

10 1274166.62 179621.0818 43717153.11 161433244.35

11 1274166.62 170640.0277 49138282.53 159988437.71

12 1274166.62 162108.0263 55214737.57 158552163.06

13 1274166.62 154002.625 62025782.88 157123993.81

14 1274166.62 146302.4937 69660250.11 155703524.70

15 1274166.62 138987.369 78217691.81 154290370.71

Total 585937106.29 2466657215.37

Total/15 39062473.75 164443814.36

=PAT/ Book Value

ARR 23.75%

Book value = Initial Investment – Depreciation

ARR of the project is 23.75%

35

Net Present Value (NPV) The net present value (NPV) of a project is the sum of the present values of all the cash flows – positive as well as negative – that are expected to occur over the life of the project.

The formula for present value is Cash flow/(1.10)^t

The formula for NPV is NPV (rate, value1, value2) - Initial Investment.

36

Present

Year Cash Flow Values r= 10%

0 -176462110

1 16478590.22 14980536.57

2 18407993.73 15213217.96

3 20572243.62 15456231.12

4 22999722.45 15709119.9

5 25722245.31 15971490.59

6 28775474.07 16243004.94

7 32199381.62 16523374.08 NPV(E1,B3:B17)+B2

8 36038771.98 16812353.1 NPV 76,913,246.19

9 40343863.25 17109736.32

10 45170940.81 17415353.11

11 50583089.17 17729064.17

12 56651012.21 18050758.35

13 63453952.12 18380349.68

14 71080719.22 18717774.95

15 79630845.80 19062991.37

NPV 76913246.19

The NPV for this project is Rs. 76,913,246.19

Internal Rate of Return (IRR)

Accept: If the IRR is greater than the cost of capital

Reject: If the IRR is less than the cost of capital

37

The following table shows the calculation of IRR using excel.

The formula used is IRR (values, [guess])

Year

Cash Flow

-

0 176462110.00

1 16478590.22

2 18407993.73

3 20572243.62

4 22999722.45

5 25722245.31

6 28775474.07 IRR(B2:B17)

7 32199381.62 IRR = 15.16%

8 36038771.98

9 40343863.25

10 45170940.81

11 50583089.17

12 56651012.21

13 63453952.12

14 71080719.22

15 79630845.80

The IRR for this project is 15.16%

38

CHAPTER – VI

CONCLUSION

With the world becoming flat, major world economies like U.S, Japan and UK are looking at

China, India, Indonesia and other developing countries whose economy is growing at a much

faster pace as compared to the world leaders. China and India have started posing threat

because of their tremendous growth rate.

This increase in growth rate is mainly on account of improvement / creation of basic

infrastructure like transportation, aviation, rail- road- port connectivity. The huge population

which was a great cause of concern few years back is now a huge market for consumption of

all the products required in day to day life. With the increase in demand of consumer

durables, their production, transportation, storage and inventory control management has

become an utmost important aspect for the industries in the sector.

In nut shell the existence of U.S, France, Japan, etc. is dependent upon the developments

taking place in India and China. The U.S companies are trying hard to establish their roots in

these countries. For their survival they have started imparting with the technologies which

earlier they were shielding for their own benefit. In such scenario the Indian government is

also providing a platform by creating state- of- the- art infrastructure in the shape of

Dedicated Freight Corridor which will enable speedy movement of cargo from consumption

areas to the gateway ports and vice-versa.

To support speedy sorting, storage, despatching, etc state-of- the- art warehousing hubs are

required and in the pretext of such economical development the creation of warehouses will

be a good venture for companies in increasing their profit graph.

The Western Freight Corridor will be passing through Rewari, Phulera, Kanakpura,

Shrimodhpur, Kishangarh, Ajmer and as such the areas near to these places will be quite

suitable for establishing warehousing facilities. Chander suburb of Jaipur is an ideally located

town which fulfils all the requirements such as availability of land, water, road-rail

connectivity, nearness to a city, availability of labour, industrial peace, which are needed for

establishing a warehouse.

39

With this background project planning for a medium size warehouse of 10000 sq.m covered

area with state- of- the– art infrastructure facilities has been considered with scope of future

expansion. This capacity with an average occupancy of 85 % utilization will fetch reasonably

good returns in short as well as long term. The cost of the project including the land and basic

equipment has been worked out as 1765 lakhs.

The income flow and expenditure chart has been worked out taking into account all the

components of depreciation, income tax , cost indexes and a comfortable IRR of 15.16 %

has been obtained, which is quite attractive for setting of the project. The initial investment

can be recovered within a short span of 7-8 years. These calculations are based on

conservative utilization of 85 % where in actual the warehouses are found to be operating at a

level of 110 to 120 % occupancy. If such level is achieved there will be bumper profits for

the company.

The following points elaborate whether the project is feasible or not :

1. Pay- back period :

The project gives a pay-back period of 7-8 years i.e. the initial investment can be

recovered within a time period of 7-8 years which is acceptable looking at earlier

projects. Thus the project is acceptable according to the pay-back period.

2. Accounting rate of return (ARR):

The accounting rate of return for this project is 23.75 %. The industry average for

ARR is 20 % and since the ARR of the project is greater than 20 % the project is

feasible.

3. Net Present Value (NPV) :

The NPV of the project is Rs. 76,913,246.19 in 15 years time which is positive. Since

the NPV is positive the project is viable to invest in.

40

4. Internal rate of return (IRR):

In case of a public company, IRR is the most important criteria in deciding whether to

invest in the project or not. Since the IRR is 15.16% which is more than10% of the

cost of capital, therefore the project is worthwhile to invest in.

Thus we conclude that the project is financially feasible since the cash outflow of

1765 lakhs in a project of 15 years can be covered in just 7-8 years. The investment in

Chander project is worthwhile and the company can go ahead of developing the

infrastructure with IRR of 15.16%.

There will be value addition in the form of increase in the value of land/ asset at

Chander as it is strategically located and huge numbers of MNC‘s / logistics

companies are making huge investments in this area. The corporation can enjoy long

term benefits by investing in this project.

41

REFERENCES

1. Wikipedia article on capital budgeting 2. Financial management – Theory and Practice by Prasanna Chandra- Tata McGraw

Hill Publication. 3. Article – ―Indian logistics market to double by 2012‖ – Silicon India news

bureau-Friday, 09 November 2007. 4. Article – ―Retail boom fuels growth in logistics sector – Amit Mitra – The

Hindu Business Line – Monday, 15 January 2007. 5. Article – ― Logistics market may reach Rs. 5.5 lakh crore size by 2014 ― –

The Economic Times – 21 February 2010 – PTI 6. Delhi Schedule of Rates – a government of India publication. 7. Central Public Works Department circulars for cost indexes. 8. Detailed Project Report (DPR) for setting up similar facilities by

Central Warehousing Corporation at Surajpur, Noida.