FINANCIAL MANAGEMENT FINAL PROJECT

SUBMITTED TO: MR. FAISAL RIZWAN DATED: 16-05-2012

Nestle Frozen Chickens

BY: MUHAMMAD KASHIF (2917-FMS/BBA/S10) & USMAN ALI (2900-/FMS/BBA/S10)

Nestle Frozen Chickens

INTRODUCTION
Nestle is a big name in the world of daily usage products. It has a huge product line, width & depth. It invests in so many products and generates revenue on a large scale. Their products lie between coffee to powdered & liquid beverages, water, milk products, nutrition, pharmaceutical products, dairy products, chocolates and so many others. The idea is to propose nestle to diversify their business in frozen items like frozen chicken. As nestle is already well known brand about their daily usage products, it would be a good idea for them to invest in frozen items to diversify their business. Its creating sense to invest in the same kind of product line but with a new concept. As frozen chickens are also daily usage products and eating item and nestle is already committed with eating, drinking, dairy products. The idea behind to choose nestle for this proposal is that they are somehow already linked with such items but in a different manner. We have studied a lot of organizations structures and investments and choose nestle for this project. If nestle invests some amount of its annual profit in this project it can increase its profit margin.

Market Analysis
Frozen items target customers from the middle class to the upper class. The major target segment is young generation which comprises of about 60% of the total population. Demand for Frozen items is growing at a combined annual growth rate of 19%. The method of distribution would be indirect selling i.e. through super markets or general stores. As for as our competitors are concerned, we have a single major competitor in the market of Pakistan i.e. K&Ns. The market for frozen items is all consumers worldwide. The potential customers of frozen items would be of age group of 14-30 years. As for the income levels, frozen items target customers from the middle class to the upper class. The market of frozen items is geographically vast. Frozen items are the largest growth segment within the ready-to-cook food category measured by volume.

Objectives
Healthier Image: As we found out through our research a lot of people are concerned about their health and hence are skeptical of the products launched, hence building a healthier brand image is very essential. Most of the popularity of the company in Pakistan would come due to the superior taste and quality of the companys product in the minds of the health conscious people. Hence one of the objectives of launching frozen items would be to promote an image of the brand that appeals to the general public as something that is refreshing as well as healthy.

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Wider Brand Recognition: With a new idea of introducing frozen goods, the company hopes to add a dimension of superior quality when positioning the brand in the mind of consumers. This will help add to the how people can relate to the brand. The ultimate goal would be to come to a point where people at the top of their head would have the brand as a leading name in the frozen meat industry. Capturing the Market: The third primary objective of launching a new frozen meat brand would be to emerge as a leading name in the frozen meat industry in Pakistan. Expanding the Product: Additionally in the long term the plan would be to expand this frozen meat line by introducing new items (nuggets, sausages, burgers etc) as this a necessary step in order to stay competitive in a market with such a high sense of competition.

Target Segmentation:
The segment our industry would be targeting is youth and those people who are having busy routines so they can cook their food within no time. As for as prices are concerned our products would be quite cheaper than our competitors based on our machinery, initial costs and production plant. So it would be easy for anyone to buy our products. Hence psychographic, demographic and behavioral segments are involved.

Advertisement and promotions:

Promotion is another important issue as well as a main tool of marketing mix. This brand would be promoted from the very start in an effective manner in order to attract customers and to retain them. This is the best way with the help of which demand can increase and that can increase the revenue too. The company will use sources like TV, radio, signboards, newspaper advertisements and promotional campaigns to attract the customers and create product awareness about the new product.

Technical arrangements:
For starting this project we need to have a plant, a complete system that starts from the cutting of chickens by halal method upto the packaging and labeling of our items. This plant is being used by other firms also which are directly involved in such category of products. The plant involves a complete system of different steps given under: Kill line Deboning and Trimming performance Yield control Quality control Grading Portioning Packing Labeling Inventory control

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FINANCIAL ANALYSIS
CURRENT CASH FLOWS OF NESTLE
In millions of CHF Share of results of associates Depreciation of property, plant and equipment Impairment of property, plant and equipment Impairment of goodwill Amortisation of intangible assets Impairment of intangible assets Net result on disposal of businesses Net result on disposal of assets Non-cash items in financial assets and liabilities Deferred taxes Taxes in other comprehensive income and equity Equity compensation plans Other 2011
(866)

2010 (1010) 2552

2 422

150

186

16 503

337 630

8 (24472)

25 39

(29) 157

(301) 859

236 266

158 31 3039

187 4 (20948)

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REQUIRED WORKFORCE FOR PROJECT
Production Staff (Factory) 01. Business Unit Manager 02. Factory Manager (Technical Manager) 03. Processing Supervisor 04. Production Supervisor 05. Electrician 06. Chemist 07. Skilled Workers 08. Helpers Reqd. No. 01 02 04 15 08 05 20 15

INITIAL INVESTMENT:
The initial investment required for the production of frozen chicken is: Cost of machinery + software = Rs. 11,000,000 Capitalization cost = Rs.1, 000, 000 Total cost = Rs.12, 000, 000

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Expected Revenue/Day (1st year)
Quantity 170 Revenue/Year: = 42500*365 = 15512500 Price/pack Rs.250 Total sales Rs.42500

Expenses (1st year)

Production Cost: Quantity 62,050 Cost/piece Rs.200 Total cost Rs.12410000

Production Cost = Rs. 12410000 Electricity = Rs. 2,400,000 Salary = Rs.1,600,000 Advertisment = Rs.500,000 Total Expense =Rs.15310000

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Expected Revenue/Day (2nd year)
Quantity 180 Revenue/Year: = 47700*365 = 17410500 Price/pack Rs.265 Total sales Rs.47700

Expenses (2nd year)

Production Cost: Quantity 65,700 Cost/piece Rs.200 Total cost Rs.13140000

Production Cost = Rs. 13140000 Electricity = Rs. 2,400,000 Salary = Rs.1,600,000 Advertisment = Rs.500,000 Total Expense =Rs.17640000

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Expected Revenue/Day (3rd year)
Quantity 185 Revenue/Year: = 52725*365 = 19244625 Price/pack Rs.285 Total sales Rs.52725

Expenses (3rd year)

Production Cost: Quantity 67,525 Cost/piece Rs.200 Total cost Rs.13505000

Production Cost = Rs. 13505000 Electricity = Rs. 2,400,000 Salary = Rs.1,600,000 Advertisment = Rs.500,000 Total Expense =Rs.18005000

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Expected Revenue/Day (4th year)
Quantity 190 Revenue/Year: = 57000*365 = 20805000 Price/pack Rs.300 Total sales Rs.57000

Expenses (4th year)

Production Cost: Quantity 69350 Cost/piece Rs.210 Total cost Rs.14563500

Production Cost = Rs. 14563500 Electricity = Rs. 2,400,000 Salary = Rs.1,600,000 Advertisment = Rs.500,000 Total Expense =Rs.19063500

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Expected Revenue/Day (5th year)
Quantity 200 Revenue/Year: = 64000*365 = 23360000 Price/pack Rs.320 Total sales Rs.64000

Expenses (5th year)

Production Cost: Quantity 73000 Cost/piece Rs.210 Total cost Rs.15330000

Production Cost = Rs. 15330000 Electricity = Rs. 2,400,000 Salary = Rs.1,600,000 Advertisment = Rs.500,000 Total Expense =Rs.19830000

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INITIAL CASH OUT FLOWS

Cost of machinery + software = Rs. 11,000,000 Capitalization cost = Rs.1,000,000 Total cost = Rs.12,000,000

INTERM CASH FLOWS

Year 1 Revenues Expenses Operating cash flow Less Dep Before Tax CF Tax @ 40% After Tax CF Add Dep Net CF 15512500 15310000 202500

Year 2 17410500 17640000 (229500)

Year 3 19244625 18005000 1239625

Year 4 20805000 19063500 1741500

Year 5 23360000 19830000 3530000

3999600 (3797100) 1518840 (2278260) 3999600 1721340

5334000 (5563500) 2225400 7788900 5334000 13122900

1777200 (537575) 215030 (322545) 1777200 1454655

889200 852300 (340920) 511380 889200 1400580

NIL 3530000 1412000 2118000 NIL 2118000

NPV= 1721340/(1.15) 13122900/(1.15)2 + 1454655/(1.15)3 + 1400580/(1.15)4 + 2118000/(1.15)5 =1496817.3+9922797.7+956459.2+800786016+1053020.3= 14230062

NPV= 14230062-12000000= 2230062

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NOTE: Interm cash flows are calculated on the basis of depreciation from the initial outflow i.e. 12,000,000. And the machine falls under the 3 years property class. Tax rate is assumed to be 40% according to the Local Policies.

IRR
(BY HIT & TRIAL METHOD) @ 24% = 1388177.419+8534664.412+762948.017+592408.36+72466.19

@ 24% =12000664.4

@ 27%= 1355385.82+8136214.27+71047.955+53835.10+641072.800

@ 27%= 11381205.95

IRR= RL+[(RH+RL)]/PVL-PVH 0.24+ (0.03)(664.4) 12000664.4-11381205.95

] =0.240032

=24.0032%

NOTE: All of the return percentages are calculated on the rough work with the gap of 3% using hit and trial method, only RH & RL are shown here.

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Payback Period
End Of Yrs 0 1 2 3 4 Cash flows 12,000,000 1721340 13122900 1454655 1400580 Acc. Cash flows 1721340 14844240 Balance 12,000,000 10278660

=1/14844240 * 120000000 = 0.80 =1+0.80 =1.80

Conclusion
The project of investing in frozen chickens for the brand Nestle can be a good decision for them as the project is paying back the original amount in 1.8 years, It has a positive NPV for the first five years of project and the IRR is approximately 24%. The cost of plant needed for the project is nearly accurate because the price of the plant was taken through the website which makes that plant and its software and sells into the market. Reference: MAREL MACHINARY

For depreciation purposes, machinery is pretended to fall in 3 years property class and Tax rate is assumed to be 40% in the local market. On the basis of all the financial results, It is recommended to accept the proposal.

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