Question

Fly Ash Case

In April 2013, Radi AlShamsi had a business plan. For quite some time, he had been doing some research exploring the potential of his 'dream project" - establishing a fly ash brick manufacturing unit in India - and had seen huge potential for profit in the project His long - time friend Ali Jabr was also interested but had a few doubts regarding the feasibility of the project Radi. on the other hand, was sure of his plan Years of work in the construction industry had shown him the potential of using large volume of fly ash bricks in construction, especially in housing and in infrastructure projects.

On the basis of preliminary analysis, he decided to set up a plant that would have the capacity to manufacturing four million bricks per year Though actual production would depend on market demand, the partners estimated that 2.4 million bricks could be sold per year at an average price of 7000 Dh per 1000 bricks. He wanted to ascertain the feasibility of the project using a cost-volume-profit (CVP) analysis.

Background:
Fly Ash was a residual obtained after combustion of coal. A huge quantity of coal is utilized to produce thermal power, the major power generation source When crushed coal is burned to generate heat, the residual product contained SOS fly ash. The fly ash from the exits flue gas was collected at various stages of the flue gas path and at the dust collector fitted before the final chimney. Market trends revealed that coal would be continue to be used as the prime fuel for many more years, resulting in a great amount of fly ash generation.
Fly ash as a construction material was considered appropriate on two accounts. First, there were environmental concerns about the traditional way of making bricks from clay that comprise topsoil. Removing this top layer makes the land infertile for a long period. Using fly ash for making bricks instead of clay would thus help preserve the fertility of the soil. Second, it was estimated that there would be a substantial shortfall in the availability of different types of
building materials, including bricks. The government was keen on promoting fly ash bricks in the construction sector. This would enable a waste product to be used in as a construction material and also conserve the environment and resources.

Manufacturing process:
Government authorities had developed technology to replace burnt clay bricks with fly ash as a construction material for building walls. The manufacturing process for those bricks, known as fly ash-lime-gypsum, required intimate mixing of fly ash, sand, added to make a fine blend. The ratio of the input material was as follow:
Fly ash: 60 to 80 percent
Sand 10 percent
Gypsum: 10 percent
Lime: 10 to 20 percent

Water was added to the mix to form a paste after the mixture was transferred to mold fitted in a hydraulic/mechanical process. The bricks were later dried in the open for one or two days and then cured using water. A process outline for manufacturing fly ash bricks is given in exhibit 1:

Brick Making Machine (there is supposed to be a diagram )
tpress)
T
Transportation
T
Dry Curing
i
Wet Curing
Drying
Inspection
v
Sorting
*
Dispatch


Exhibit 1
Market potential:
The annual demand for clay bricks for construction purpose was estimated to be 180 billion tones that required almost 340 billion tones of clay annually. Production of clay bricks required clay that resulted in leeching the fertility of the land in the long run. With construction progressing at very fast pace, the government was keen to develop a regular supply of bricks without causing damage to the soil.
The use of fly ash in such circumstances was a priority. The quality and durability of fly ash bricks were considered very suitable for application in various construction projects. A large quantity Of fly ash was available as waste material from thermal power plants. The government was waging manufacturing of fly ash bricks, and various concessions were given to such manufacturing. Further, these bricks were factory-made by mixing the ingredients with water without consuming thermal energy.
Manufacturers of construction materials had also begun to note the importance and application of fly ash bricks. They knew that with an increase in construction activities, there will be an equally rising demand for bricks. The housing sector was predicted to experience a shortage of 20 million to 70 million home units, which presented a ripe market for the use of cheap fly ash as a raw material in construction On the basis of such preliminary analysis, Radi AlShamsi decided to set up a plant that would have the capacity to manufacturing four million bricks. He presented the calculations for:

Investment required:
Radi AlShamsi said we require 8 million Dh as initial investment in fixed assets. Here, take a look at the costing According to my estimate, the major expenses would be in transport vehicles and machinery. The building modifications will require approximately 1.40 million Dh. The water supply arrangements will be another minor expense (see exhibit 2 for estimated expenses)
Estimated investment costs (in Dh)
Building modifications 1,400,000 ;
Water supply arrangements 100,000
Machinery 2,000,000
Trucks 3,000,000
Ray toad machine 1,500,000
Total 8.000,000


Exhibit 2
in addition to the above investments costs. I have estimated the working capital requirements, which are expected to be approximately 2 million Dh. Other routine expenses are estimated as Routine expenses per month.
By the way there would be other expenses related to the volume of production these are essentially the raw materials energy and labor would be 900000 dh which will be related to volume of production (for 0.20 million bricks)
Fly ash.    250000
Gypsum. 250000
Lime. 300000
Sand 300000
Electricity 40000
Labor. 50000
Total 900000


Exhibit 4
Hadi AiShamsi also estimated the manpower costs as in exhibit 5 In addition, Radi AiShamsi himself would work as a production manager, since hiring another person for the post would Cost them Dh 50,000 Ali Jabari (the other partner) was puzzled and wanted to ascertain more dearly the feasibility of the project f hey agreed to consult expert to evaluate their business plan.

Personnel costs per month
1 Workers Dh 100.000
| Office assistant 20,000
! Watchman 15.000
25,000
foul 160,000


Exhibit 5
Final Decision:
A detailed discussion followed the conversation. Although the proposed plant had the capacity to produce four million bricks per year, actual production would depend on market demand.
Fnither, output would decline in case of any breakdowns of plant and equipment. Finally, the paitners estimated that a sales volume of 2.4 million bricks could be sold per year at an average price of Dh 7.000 per 1000 bricks (1000 bricks is the unit of production). The initial investment would cost Dh 10 million, out of which Dh 6 million would be invested by partners from their own resources. A local bank had agreed to provide a loan for the balance (Dh 4 million) at an interest rate of 12% per year. Radi AiShamsi would work full time in the business and WQuW draw a salary of Dh 50,000 per month. The life of the project was estimated to be five years. The salvage value of the plant and equipment at the end of the project life would be nothing (no scrap value). However, investment in the working capital would be recovered in full.


Questions;
1 Analyze various expenses into annual fixed cost, variable cost, and initial investment
2 Find the breakeven point
3 many bricks need to be sold so as to earn a targeted income of Dh 2 million per year
4 What advice can be given to the owners?

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Capacity 4000000
No. of Bricks sold 2400000
Average price 7 per brick
Initial Investment 8000000
Building Modifications 1400000
Working Capital 2000000
Cost of Good sold 4,5 per brick
Personeel cost 160000 per month
Equity 6000000
Debt 4000000
Interst Rate 12%
Radi's Salary 50000 per month
Life 5 years...

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