Chapter # 1IntroductionAttock Petroleum Limited is the 3rd largest Oil Marketing Company in Pakistan. It was incorporated in Pakistan as a public limited company on December 3, 1995 and was granted a marketing license in February 1998. APL is part of the first fully integrated Oil Company of the sub-continent; APLs sponsors include Pharaon Commercial Investment Group Limited (PCIGL) and Attock Group of Companies. APL is one of the fastest growing oil marketing companies in Pakistan having a successfully established network of petrol pumps in NWFP & Punjab. APL is presently strengthening its presence in major urban areas such as Karachi, upper Punjab and Afghanistan.Attock Petroleum is part of the Attock Group of Companies, which is the only fully integrated group in the oil & gas sector of Pakistan involved in Exploration & Production, Refining& marketing. Attock Petroleum's corporate head office is registered in Rawalpindi.Pharaon Group:Pharaon Group is engaged internationally in diversified entrepreneurial activities, including Hotels, Oil Exploration, Production and Refining, Manufacturing of Petroleum Products, Chemicals, Manufacturing and Trading of Cement, Real Estate etc. Attock Group of Companies:The Attock Group of companies consists of The Attock Oil Company Limited (AOC), Pakistan Oilfields Limited (POL), Attock Refinery Limited (ARL), Attock Petroleum Limited (APL), Attock Information Technology Services (Pvt) Limited (AITSL), Attock Cement Pakistan Limited (ACPL) etc. AOC was incorporated with limited liability in England on December 01, 1913. The company is principally engaged in exploration, drilling and production of petroleum and related activities in Pakistan. AOC is the pioneer in the oil sector in Pakistan. Its first oil discovery in Pakistan was made in Khaur district Attock in 1915. The refining operations were started in 1922 at Morgah near Rawalpindi.

VisionTo become a world class, professionally managed, fully integrated, customer focused, Oil Marketing Company, offering value added quality and environment friendly products and services to its customers in Pakistan and beyond.MissionTo continuously provide quality and environment friendly petroleum products and related services to industrial, commercial and retail consumers, and exceeding their expectations through reliability, economy and quality of products and services. We are committed to benefiting the community and ensuring the creation of a safe, responsible and innovative environment geared to client satisfaction, end user gratification, employees motivation and shareholders value.Products of Attock Petroleum Limited Light Diesel Oil Mineral Turpentine Oil High Speed Diesel Premier Motor Gasoline Jute Batching Oil Jet Fuels (JP1, JP4, JP8) Solvent Oil Superior Kerosene Oil Bitumen Lubricants Rubber Process Oil Naphtha Furnace Fuel Oil

PURPOSE

The objective of the pre-feasibility study is to provide the entrepreneur with potential investment opportunity in setting up and operating a Fuelling Station business. The project pre-feasibility may form the basis of an important investment decision and in order to serve this objective, the document/study covers various aspects of the business concept development, start-up, production, marketing, and finance and business management. The document also provides sectoral information, brief on government policies and international scenario, which have some bearing on the project itself.

This particular pre-feasibility is regarding Petrol & Diesel Fuelling Station which comes under Petroleum sector.

PROJECT INPUTS

Proposed Capacity

The annual sales capacity of the station will be 2.85 million litters of petrol & diesel, based on double-shift services. For financial projection Capacity utilization will be 80% in the first year; and increased at a rate of 5% annually and will be capped at 95%.

Land

The total land requirement would be of 15,000 Sqfts. to install various facilities of the project, inclusive of car wash, tire shop and office building.

Suitable Locations

The Fuelling Station is recommended to be installed next to the populated area while considering other mandatory inputs i.e. availability of human resource, electricity and water etc. for the purpose, a location in the main city would be feasible to make sure a healthy number of populations is around the fuelling station along with the compulsory infra-structure.

Office Equipment

Office Equipment

DescriptionQtyCost/UnitTotal Amount (PKR)

Computer112,00012,000

Printer16,0006,000

Telephone21,0002,000

Fax Machine with Extra Phone Line112,00012,000

Total32,000

Furniture & Fixture

DescriptionTotal Amount (PKR)

Furniture30,000

Air conditioners (1.5 Ton Window)24,000

Total54,000

Human Resource Requirements

The possible human resource requirements for the project are provided in the following table:

Human Resource Details

DesignationNumberPer MonthAnnually

Salary (Rs)(Rs)

Supervisor112,000144,000

Dispenser Operator64,500324,000

Watch Man15,00060,000

Sweepers12,50030,000

RS. 558,000

The anticipated work forces include 9 numbers of employees consisting of 1 supervisor, 6 dispenser operator, 1 Watch Man, and a sweeper.

Duties of the Labors

1. Fuelling the vehicles.

2. Selling the lubricants.

3. Counting and accepting the cash

4. Operating the machinery

5. Cash Management.

6. Book Keeping

Infrastructure Requirement

The infrastructure requirements of the project will be:

a. Power b. Water

c. Railway/Road d. Telecommunication Land and Building Requirement

Land Cost

DescriptionCost/sq.ftArea in sq.ftTotal Cost (Rs.)

Land2,50015,00037,500,000

Building Construction Cost

DescriptionCost/sq.ftArea in sq.ftTotal Cost (Rs.)

Office Building1,200240288,000

Car Wash800224179,200

Tire Shop1,200120144,000

TotalRS. 611,200

Chapter # 2

Capital Budgeting: Cash flow Estimation

Theoretical Overview

Cash flow estimationis a must for assessing the investment decisions of any kind. To evaluate these investment decisions there are some principles of cash flow estimation. In any kind of project, planning the outputs properly is an important task.At the same time, the profits from the project should also be very clear to arrange finances in a proper way. These forecastings are some of the most difficult steps involved in the capital budgeting. These are very important in the major projects because any kind of fault in the calculations would result in huge problems.

The project cash flows consider almost every kind of inflows of cash. The capital budgeting is done through the co-ordination of a wide range of professionals who are going to be involved in the project.

Analysis

FINANCIALANALYSIS

Financial Evaluation of Pre-feasibility Fuelling Station

Key Variables

Total Investment in Project39,755,260

Equity60%23,852,131

Debt40%15,903,129

Interest Rate18%

Debt Tenure5

Total Number of Employees9

Rs. in actuals

Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10

Free Cash Flow to Equity (FCFE)(5,987,990)1,862,41120,324,44336,694,25953,320,79477,063,68497,871,485120,966,469146,580,633176,211,483

Free Cash Flow to Firm (FCFF)(6,651,562)12,262,84624,972,04641,464,43258,235,59777,063,68497,871,485120,966,469146,580,633242,227,745

Profit margin on sales-1%7%13%20%25%31%36%40%44%48%

ROE-9%32%43%42%38%33%30%27%25%23%

Times interest earned0.425.2516.4437.6297.31-----

EquityProject

Internal Rate of Return (IRR)68%56%

Modified Internal Rate of Return (MIRR)*43%34%

Payback Period (yrs)3.053.22

Net Present Value (NPV)@ 16%232,816,329@ 12%306,244,247

Projected Income Statement

Statement Summaries

Rs. in actuals

Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10

Revenue131,497,344153,687,521179,000,760207,839,771228,623,748251,486,123276,634,735304,298,208334,728,029368,200,832

Cost of goods sold129,722,861137,861,683146,008,014154,162,724154,233,935154,312,158154,398,083154,492,467154,596,145154,710,030

Gross Profit1,774,48315,825,83732,992,74653,677,04774,389,81397,173,964122,236,652149,805,741180,131,885213,490,802

General administration & selling expenses

Administration expense354,000388,466462,414507,435556,839611,054670,547735,833807,474886,091

Utilities expense3,2003,3003,4103,5313,6643,8113,9724,1494,3444,558

Comm. expense (phone, fax, etc.)169,920186,464221,959243,569267,283293,306321,863353,200387,588425,324

Office expenses (stationary, etc.)14,16015,53918,49720,29722,27424,44226,82229,43332,29935,444

Professional fees (legal, audit, etc.)65,74976,84489,500103,920114,312125,743138,317152,149167,364184,100

Depreciation expense39,16039,16039,16039,16039,16039,16039,16039,16039,16039,160

Amortization expense42,40042,40042,40042,40042,40040,00040,00040,00040,00040,000

Subtotal688,589752,172877,339960,3121,045,9321,137,5161,240,6811,353,9231,478,2291,614,677

Operating Income1,085,89515,073,66532,115,40752,716,73573,343,88196,036,449120,995,972148,451,818178,653,656211,876,125

Other income300,200343,344597,6851,203,5912,143,0333,490,0985,286,9917,527,66710,260,66513,551,865

Earnings Before Interest & Taxes1,386,09515,417,01032,713,09153,920,32675,486,91399,526,546126,282,963155,979,485188,914,321225,427,989

Interest expense3,335,2742,935,1511,990,2951,433,164775,749-----

Earnings Before Tax(1,949,179)12,481,85930,722,79652,487,16274,711,16499,526,546126,282,963155,979,485188,914,321225,427,989

Tax-2,317,1906,759,01511,547,17616,436,45621,895,84027,782,25234,315,48741,561,15149,594,158

NET PROFIT/(LOSS) AFTER TAX(1,949,179)10,164,66923,963,78140,939,98658,274,70877,630,70698,500,711121,663,999147,353,170175,833,832

Balance brought forward(1,949,179)8,215,49032,179,27173,119,258131,393,965209,024,671307,525,383429,189,381576,542,551

Total profit available for appropriation(1,949,179)8,215,49032,179,27173,119,258131,393,965209,024,671307,525,383429,189,381576,542,551752,376,383

Dividend----------

Balance carried forward(1,949,179)8,215,49032,179,27173,119,258131,393,965209,024,671307,525,383429,189,381576,542,551752,376,383

Projected Balance Sheet

Statement Summaries

Rs. in actuals

Year 0Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10

Assets

Current assets

Cash & Bank500,000-1,862,41122,186,85358,881,113112,201,906189,265,590287,137,075408,103,543554,684,176730,895,660

Accounts receivable-3,602,6673,906,6424,557,3745,299,1855,978,9526,576,8487,234,5327,957,9868,753,7849,629,162

Raw material inventory646,060720,761801,317888,126932,532979,1591,028,1171,079,5231,133,4991,190,174-

Total Current Assets1,146,0604,323,4286,570,36927,632,35365,112,830119,160,018196,870,554295,451,130417,195,028564,628,134740,524,822

Fixed assets

Land37,500,00037,500,00037,500,00037,500,00037,500,00037,500,00037,500,00037,500,00037,500,00037,500,00037,500,000

Building/Infrastructure611,200580,640550,080519,520488,960458,400427,840397,280366,720336,160305,600

Machinery & equipment-----------

Furniture & fixtures54,00048,60043,20037,80032,40027,00021,60016,20010,8005,400-

Office vehicles-----------

Office equipment32,00028,80025,60022,40019,20016,00012,8009,6006,4003,200-

Total Fixed Assets38,197,20038,158,04038,118,88038,079,72038,040,56038,001,40037,962,24037,923,08037,883,92037,844,76037,805,600

Intangible assets

Pre-operation costs12,0009,6007,2004,8002,400------

Legal, licensing, & training costs400,000360,000320,000280,000240,000200,000160,000120,00080,00040,000-

Total Intangible Assets412,000369,600327,200284,800242,400200,000160,000120,00080,00040,000-

TOTAL ASSETS39,755,26042,851,06845,016,44965,996,873103,395,790157,361,418234,992,794333,494,210455,158,948602,512,894778,330,422

Liabilities & Shareholders' Equity

Current liabilities

Accounts payable-1,779,9021,891,6322,003,4482,114,6832,115,3212,115,9922,116,6962,117,4362,118,2122,101,908

Short term debt-5,487,990---------

Total Current Liabilities-7,267,8921,891,6322,003,4482,114,6832,115,3212,115,9922,116,6962,117,4362,118,2122,101,908

Other liabilities

Long term debt15,903,12913,680,22411,057,1967,962,0234,309,719------

Total Long Term Liabilities15,903,12913,680,22411,057,1967,962,0234,309,719------

Shareholders' equity

Paid-up capital23,852,13123,852,13123,852,13123,852,13123,852,13123,852,13123,852,13123,852,13123,852,13123,852,13123,852,131

Retained earnings-(1,949,179)8,215,49032,179,27173,119,258131,393,965209,024,671307,525,383429,189,381576,542,551752,376,383

Total Equity23,852,13121,902,95232,067,62156,031,40296,971,388155,246,096232,876,802331,377,513453,041,512600,394,682776,228,514

TOTAL CAPITAL AND LIABILITIES39,755,26042,851,06845,016,44965,996,873103,395,790157,361,418234,992,794333,494,210455,158,948602,512,894778,330,422

Projected Cash Flow

Statement Summaries

Rs. in actuals

Year 0Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10

Operating activities

Net profit-(1,949,179)10,164,66923,963,78140,939,98658,274,70877,630,70698,500,711121,663,999147,353,170175,833,832

Add: depreciation expense-39,16039,16039,16039,16039,16039,16039,16039,16039,16039,160

amortization expense-42,40042,40042,40042,40042,40040,00040,00040,00040,00040,000

Deferred income tax-----------

Accounts receivable-(3,602,667)(303,975)(650,732)(741,812)(679,767)(597,895)(657,685)(723,453)(795,799)(875,378)

Raw material inventory(646,060)(74,701)(80,556)(86,809)(44,406)(46,627)(48,958)(51,406)(53,976)(56,675)1,190,174

Accounts payable-1,779,902111,730111,816111,235639671704739776(16,304)

Other liabilities-----------

Cash provided by operations(646,060)(3,765,085)9,973,42923,419,61640,346,56357,630,51377,063,68497,871,485120,966,469146,580,633176,211,483

Financing activities

Change in long term debt15,903,129(2,222,905)(2,623,028)(3,095,173)(3,652,304)(4,309,719)-----

Change in short term debt-5,487,990(5,487,990)--------

Issuance of shares23,852,131----------

Cash from financing activities39,755,2603,265,085(8,111,018)(3,095,173)(3,652,304)(4,309,719)-----

Investing activities

Capital expenditure(38,609,200)----------

Acquisitions-----------

Cash from investing activities(38,609,200)----------

NET CASH500,000(500,000)1,862,41120,324,44336,694,25953,320,79477,063,68497,871,485120,966,469146,580,633176,211,483

Cash balance brought forward500,000-1,862,41122,186,85358,881,113112,201,906189,265,590287,137,075408,103,543554,684,176

Cash available for appropriation500,000(0)1,862,41122,186,85358,881,113112,201,906189,265,590287,137,075408,103,543554,684,176730,895,660

Dividend-----------

Cash carried forward500,000-1,862,41122,186,85358,881,113112,201,906189,265,590287,137,075408,103,543554,684,176730,895,660

Chapter # 3Capital Budgeting Techniques

Theoretical Overview

Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.The following is the formula for calculating NPV:

where:Ct= net cash inflow during the periodCo= initial investmentr = discount rate, andt = number of time periods

IRRThe discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.

Payback PeriodThe length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions.Calculated as:Payback Period = Cost of Project / Annual Cash InflowsAnalysisProjected IRR, Payback Period and NPVDescriptionEquityProject

IRR68%56%

MIRR43%34%

Pay Back Period (Yrs)3.053.22

Net Present Value (NPV)232,816,329306,244,247

Chapter # 4Cost of CapitalTheoretical OverviewCost of CapitalThe cost of funds used for financing a business. Cost of capital depends on the mode of financing used it refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed solely through debt. Many companies use a combination of debt and equity to finance their businesses, and for such companies, their overall cost of capital is derived from a weighted average of all capital sources, widely known as the weighted average cost of capital (WACC). Since the cost of capital represents a hurdle rate that a company must overcome before it can generate value, it is extensively used in the capital budgeting process to determine whether the company should proceed with a project.AnalysisCost of EquityBy using capital asset pricing model we have determined: Risk free Rate=0.1180 Market Rate=0.001 Beta=1.08By putting these values in the formula we get:CAPM=Rf+ (Rm-Rf) CAPM=0.1180+1.08(0.001-0.1180)CAPM=0.1180+ (0.1263)CAPM= -0.008

Cost of DebtKd= Ki (1-Tax Rate)Kd= 0.135(1-0.35)Kd = .0.135(0.65)kd =0.087Now, putting all those values in WAACWACC= Ke(We)+ Ki(Wd)WACC =-0.0083*.60+0.087 *0.40WACC = -0.00498+0.0348WACC = 0.02982 or 2.98%PROJECT ECONOMICS

Project Cost

DescriptionAmount in (Rs.)

Land37,500,000

Building & Infrastructure611,200

Furniture & Fixtures54,000

Office Equipment32,000

Pre-operating costs12,000

Company Joining Fee and Security400,000

Total Capital Cost38,609,200

Working Capital

Raw Material Inventory646,060

Cash500,000

Total Working Capital1,146,060

Total Project Cost39,755,260

Chapter # 5Leverage and Capital StructureTheoretical OverviewDegree of Financial Leverage A ratio that measures the sensitivity of a companys earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT), and can be mathematically represented as follows:

DFL can also be represented by the equation below:

Degree of Operating LeverageA type of leverage ratio summarizing the effect a particular amount of operating leverage has on a company's earnings before interest and taxes (EBIT). Operating leverage involves using a large proportion of fixed costs to variable costs in the operations of the firm. The higher the degree of operating leverage, the more volatile the EBIT figure will be relative to a given change in sales, all other things remaining the same. The formula is as follows:

Analysis

Degree of Financial Leverage = -71%

Degree of Operating Leverage = 1.41%

Degree of Total Leverage = -1.001%

Chapter # 6

Conclusion

We have completed the capital budgeting analysis of Attock Petroleum for the selection of the filling station project. We used required rate of return based on the weighted average cost of capital used by Attock Petroleum to make its investment decisions. After going through the whole project we have been able to analyze how companies make investment decision using capital budgeting techniques, cost of capital and leverage concepts. From the capital budgeting project we learned how every activity of business affect the investment decision of the company and without the clear analysis of statement we cannot make effective investment decision .It is not possible for any investment decision that cash flows receives is according to the estimated cash flows there may be difference in it. But capital budgeting techniques provides some indication about the investment future cash flows on the basis of previous performance of business.

KEYASSUMPTIONS

Project Capacity Assumptions

DescriptionCalculation

Assumed Total Sale / Day8,000 Liters

Assumed Wastages1 % (80 Liters/Day)

Assumed total No. of Business Days360

Total Yearly Assumed Capacity7,920 * 360 = 2,851,200 Liters / Year

Assumed Capacity Utilization 1st Year80%

Assumed Growth in Capacity Utilization5%

Maximum Attainable Capacity95%

Revenue Assumptions

DescriptionCalculation

Average Price / LiterRs. 57.65

Price Growth Rate / Year10%

Additional Yearly Income from TireShop andRs. 295,200

Service Station Rent

1st Year Revenue57.65 * (2,851,200 * 0.8) = Rs.

131,497,344

Total Revenue in Year 1Rs. 131,792,544

Economic Assumptions

Electricity Price Growth Rate10%

Gas Price Growth Rate10%

Water Price Growth Rate10%

Salary Growth Rate10%

Expense Assumptions

Fuel Transportation Expenses40% of administration expense

Telephone and Internet Expense8% of administration expense

Office Expense4% of administration expense

Professional Fee (Legal, Audit etc)0.1% of revenue

Operating Cost Growth Rate5%

Depreciation Expense Assumptions

Depreciation MethodStraight Line

Furniture & Fixtures5%

Office Equipment5%

Cash flow Assumptions

Accounts Receivables Cycle (In Days)10

Accounts Payable Cycle (In Days)5

Initial Cash in Bank500,000

Financing Assumptions

Debt40%

Equity60%

Long Term Debt Interest Rate18%

Tax Treatment35%

Discount Rate for NPV (WACC)12 %