Solution 3 1. a. Cost of project: (in Rs. Lacs) A i. ii. iii. iv. v. vi. vii. viii.

B i. ii. iii. iv. v vi. C i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii.

Land:
Basic cost land Stamp duty @ 16% Cost of leveling the site Cost of laying internal roads Cost of approach roads Cost of boundary walls and main gate Cost of tube-well digging Cost of Water Reservoir Building and Civil Works: Factory Building Administrative Building Generator Room Staff Quarter Raw Material Godown Finished Goods Godown Plant and Machinery: Intermix Mill Strainer Custom duty on imported capital equipment @ 35% Mixing Mill Extruder and Extrusion Line Leaf Truck Splicing Machine Mechanical and Hydraulic Press Moulds Air Compressor Pump Motors Excise paid (iv + v + vi + vii + viii + ix + x + xi) 0.15 Octroi, Freight, Transportation, Loading, Unloading, Clearing and Forwarding Charges @ 4% (iv + v + vi + vii + viii + ix + x + xi) 0.04 Erection charges (i + ii + iv + v + vi + vii + viii + ix + x + xi) 0.04 462.00 422.00 309.40 108.00 64.00 1050.00 104.00 52.80 40.00 48.00 4.75 220.73 110.00 17.60 0.45 5.62 4.32 1.21 0.82 2.70 142.72 142.72

205.25 136.54
22.35 32.30 17.50 18.93 432.87 432.87

xiv.

58.86 94.22 3038.77 3038.77

D i. ii.

Miscellaneous fixed assets (MFA) Office Equipments Other MFAs 15.00 9.10 24.10 24.10

E i. ii. iii. F i. ii. iii. iv. v. G i. H

Preliminary expenses (Less issue expenses) Legal charges for memorandum and articles of association Cost of market survey Cost of preparing feasibility report Pre-operative expenses Travelling Expenses Printing & Stationary Expenses Advertising Expenses Interest & Insurance during Construction Period Guarantee Commission Contingencies (B + C + D) x 0.10 Margin money for working capital 2.65 2.23 21.00 4.37 4.33 34.58 0.85 2.00 0.75 3.60

3.60

34.58

349.57 116.60
4142.82

Total Cost of Project (less issue expenses)

Total cost of the project (Less the public issue expenses) = (A + B + C + D + E + F + G + H) = 4142.82 Lacs Money to be raised through public issue = 4142.82 2000 1200 Rs.942.82 Lacs.
942.82 0.95

Size of the issue = = Rs.992.44 Lacs and so the issue expenses = Rs.49.62 Lacs. Total preliminary expenses = 49.62 + 3.60 = Rs. 53.22Lacs. Total cost of project = 4142.82 + 49.62 = Rs.4192.44 Lacs. b. Means of finance: Equity Promoters Public Term loan Total (in Rs. Lacs) 1200.00 992.44 2000.00 4192.44

Computation of Working Capital (in Rs. Lacs) Particulars

Raw materials Consumables Work in Progress Finished Goods Debtors Working expenses Total Bank finance Margin money (25%)

Period (months) 1.0 2.0 0.5 1.0 1.0 1.0

Yr. 1
70.62 1.41

Yr. 2
89.40 1.79

Yr. 3
102.00 2.04

Yr. 4
107.10 2.14

Yr. 5
112.45 2.25

48.41 115.46 186.37 44.13 466.41 349.80 116.60

61.32 146.53 238.86 56.24 594.15 445.61 148.54

69.60 166.34 271.44 63.32 674.73 506.05 168.68

72.97 174.44 285.01 66.27 707.94 530.96 176.99

76.50 182.92 299.26 69.34 742.72 557.04 185.68

2.

Profitability Statement: (in Rs. Lacs) Year 1

Net Sales Variable Expenses Raw Material Power & Fuel Consumables (1% of raw Material Cost) Other manufacturing expenses Wages Total Variable expenses Fixed Expenses Selling, Administrative and other Expenses Total Fixed Expenses OPBIDT Less: Depreciation OPBIT 847.47 193.53 8.47 32.18 80.23 1161.88 1072.83 250.14 10.73 36.79 101.28 1471.76 1224.00 281.57 12.24 33.34 119.18 1670.32 1285.20 293.58 12.85 34.56 125.14 1751.33 1349.46 305.72 13.49 35.85 131.40 1835.91 2236.41

Year 2
2866.37

Year 3
3257.26

Year 4
3420.12

Year 5
3591.13

223.64 223.64 850.89 367.55 483.34

286.64 286.64 1107.97 367.55 740.42

325.73 325.73 1261.21 367.55 893.66

342.01 342.01 1326.78 367.55 959.23

359.11 359.11 1396.10 367.55 1028.55

Less: Financial Charges Interest on working capital Interest on term loan Total Financial charges OPBT Preliminary Expenses Written off
PBT

38.48
180.00

49.02
180.00

55.67
144.00

58.41
115.20

61.27
80.64

218.48 264.86 10.64 254.22 0.00 254.22

229.02 511.41 10.64 500.76 65.83 434.93

199.67 694.00 10.64 683.35 178.23 505.12

173.61 785.63 10.64 774.98 232.15 542.83

141.91 886.64 10.64 875.99 283.65 592.35

Provision for tax

PAT

(@ 30%)

Working Notes: 1. 1. Sales Volume and Sales Value: (in Rs. Lacs) Year 1
Installed Capacity A) Automobile Tubes 2/3 Wheeler Tubes (Nos.) Passenger Car/Jeep Tubes (Nos.) Light Commercial Vehicle/Truck Tubes (Nos.) B) Giant Tyre Flaps (Nos.) Total Capacity Utilization Actual Production A) Automobile Tubes 2/3 Wheeler Tubes (Nos.)
in M.T ( 1 No. = 0.45 Kg)

Year 2

Year 3

Year 4

Year 5

1512000 585000 324000 252000 2673000 74.07%

1512000 585000 324000 252000 2673000 88.55%

1512000 585000 324000 252000 2673000 100.00%

1512000 585000 324000 252000 2673000 100.00%

1512000 585000 324000 252000 2673000 100.00%

1134000 510 351000 421

1323000 595 468000 562 324000 875 252000 504

1512000 680 585000 702 324000 875 252000 504

1512000 680 585000 702 324000 875 252000 504

1512000 680 585000 702 324000 875 252000 504

Passenger Car/Jeep Tubes (Nos.)

in M.T ( 1 No. = 1.20 Kg)

Light Commercial Tubes (Nos.)

in M.T ( 1 No. = 2.70 Kg)

Vehicle/Truck 243000 656 252000 504

B) Giant Tyre Flaps (Nos.)

in M.T ( 1 No. = 2.00 Kg)

Total Sales (Rs.in Lacs) A) Automobile Tubes 2/3 Wheeler Tubes (Nos.) (unit S.P in Rs./No.) (5 % increase per annum) Passenger Car/Jeep Tubes (Nos.) (unit S.P in Rs./No.) (5 % increase per annum) Light Commercial Vehicle/Truck Tubes (Nos.) (unit S.P in Rs./No.) (5 % increase per annum) B) Giant Tyre Flaps (unit S.P in Rs./No.) (5 % increase per annum)

1980000

2367000

2673000

2673000

2673000

680.40 60.00 333.45 95.00 806.76 332.00 415.80 165.00

833.49 63.00 466.83 99.75 1129.46 348.60 436.59 173.25

1000.19 66.15 612.71 104.74 1185.94 366.03 458.42 181.91

1050.20 69.46 643.35 109.97 1245.23 384.33 481.34 191.01

1102.71 72.93 675.52 115.47 1307.50 403.55 505.41 200.56

Net Annual Turnover

2236.41

2866.37

3257.26

3420.12

3591.13

2. 2.

Raw Materials: (Rs. In Lacs) Particulars

Raw Materials (Rs.in Lacs)

Year 1

Year 2

Year 3

Year 4

Year 5

A) Automobile Tubes (i) Requirement (Input - Output Ratio = 1:1) (in M.T) (ii) (Cost in Rs./M.T.) (5% increase p.a.) (a) COST =[ (i) x (ii) ] B) Giant Tyre Flaps Requirement (54% of Sales) (b) COST Raw Material Cost [A +B]
Power (Rs.in Lacs)

1587.60 39237.50 622.93

2031.75 41199.38 837.07

2257.20 43259.34 976.45

2257.20 45422.31 1025.27

2257.20 47693.43 1076.54

224.53 847.47

235.76 1072.83

247.55 1224.00

259.92 1285.20

272.92 1349.46

A) Automobile Tubes (i) Requirement 1.12 KW per Kg of Production (ii) Power Requirement ( in KW) for Manufacturing = [(i) x Actual Production in M.T x 1000] (iii) Power Requirement (KW) for Job Work (Given) (iv) Total Power Requirement

1.12

1.12

1.12

1.12

1.12

1778112 180000 1958112

2275560 180000 2455560

2528064 180000 2708064

2528064 180000 2708064

2528064 180000 2708064

(Units) = ( ii + iii) (v) (Cost in Rs./Unit) COST = [ iv x v] B) Giant Tyre Flaps COST (7% of Sales) Power Cost [A + B]
Fuel (Rs.in Lacs)

5.00 97.91 29.11 127.01

5.10 125.23 30.56 155.79

5.20 140.87 32.09 172.96

5.31 143.69 33.69 177.38

5.41 146.56 35.38 181.94

A) Automobile Tubes COST B) Giant Tyre Flaps COST (4% of Sales) High Speed Diesel ( for Generator) Fuel Cost [A + B] 47.47 16.63 2.42 66.52 74.10 17.46 2.78 94.35 87.07 18.34 3.20 108.60 93.25 19.25 3.69 116.19 99.87 20.22 3.69 123.77

3.

Allocation of contingencies and pre-operative expenses on different fixed assets: (Rs. In Lacs)

Cost
Buildings Plant and machinery MFA Total 432.87 3038.77 24.10 3495.74

Contingencies
43.29 303.88 2.41 349.57

Pre-operative expenses
4.28 30.06 0.24 34.58

Total
480.44 3372.71 26.75

3. 4. Depreciation as per Income Tax Act, 1961: (a) Buildings: (Rs. In Lacs) Year 1
Opening balance Depreciation @ 5% Closing balance

Year 2 456.42. 22.82 433.60 Year 2 2698.17 539.63 2158.53 Year 2

Year 3 433.60 21.68 411.92 Year 3 2158.53 431.71 1726.83 Year 3

Year 4 411.92 20.60 391.32 Year 4 1726.83 345.37 1381.46 Year 4

Year 5 391.32 19.57 371.75 Year 5 1381.46 276.29 1105.17 Year 5

480.44 24.02 456.42 Year 1

(b) Plant and machineries:

Opening balance Depreciation @ 20% Closing balance

(Rs. In Lacs)

3372.71 674.54 2698.17 Year 1

(c) MFAs :

(Rs. In Lacs)

Opening balance Depreciation @ 20% Closing balance Total Depreciation

26.75 5.35 21.40 703.91

21.40 4.28 17.12 566.73

17.12 3.42 13.70 456.81

Book Value (Rs. In Lacs) 480.44 3372.71 26.75

13.70 2.74 10.96 368.70

10.96 2.19 8.76 298.05

4. 5.

Depreciation for Companies Act, 1956:

Rate of Depreciation Depreciation (Rs. In Lacs) 16.05

Buildings Plant & Machinery MFA

3.34% 10.34% 10.34% TOTAL

348.74 2.77
367.55

5. 6. Other Manufacturing Expenses and Wages calculation: In Lacs) Other Manufacturing Expenses
(i) ( % of Raw Material Consumption) (ii) COST ( i x Raw Material Cost) (iii) Other Expenses Other Manufacturing Expenses (ii+ iii) Wages A) Automobile Tubes 2/3 Wheeler Tubes (Per unit cost of Wages in Rs./No.) Passenger Car/Jeep Tubes (Per unit cost of Wages in Rs./No.) Light Commercial Vehicle/Truck Tubes (Per unit cost of Wages in Rs./No.) B) Giant Tyre Flaps (Per unit cost of Wages in Rs./No.) Cost of Wages ( Actual Production in Units x Per unit cost of wages / 100000)

(Rs. Year 4
2.00% 25.70 8.86 34.56

Year 1
2.75% 23.31 8.87 32.18

Year 2
2.50% 26.82 9.97 36.79

Year 3
2.00% 24.48 8.86 33.34

Year 5
2.00% 26.99 8.86 35.85

3.50 4.30 5.65 4.65 80.23

3.68 4.52 5.93 4.88 101.28

3.86 4.74 6.23 5.13 119.18

4.05 4.98 6.54 5.38 125.14

4.25 5.23 6.87 5.65 131.40

7.

Term loan Repayment Schedule:

Year 1 2 3 4 5

(in Rs. In Lacs)

Closing balance

Opening balance 2000.00 2000.00 1600.00 1280.00 896.00

Amount repaid 0.00 400.00 320.00 384.00 896.00

2000.00 1600.00 1280.00 896.00 0.00

Interest @ 9% 180.00 180.00 144.00 115.20 80.64

8. Lacs)

Short-term bank finance:

Year 1 2 3 4 5

(in
Interest @13% 38.48 44.02 55.67 58.41 61.27

Rs.

in

Amount of Short-term loan 349.80 445.61 506.05 530.96 557.04

Year 1

9. Computation of Tax: Year 2

500.76 367.55 566.73 82.15 219.43 65.83

Year 3
683.35 367.55 456.81 0.00 594.09 178.23

Year 4
774.98 367.55 368.70 0.00 773.83 232.15

Year 5
875.99 367.55 298.05 0.00 945.49 283.65

Profit before Tax Add: Depreciation (SLM) Less: Depreciation (WDV) Less: Unabsorbed Losses Taxable income Tax @ 30%

254.22 367.55 703.91 0.00 -82.15 0.00

3. Cash (Rs. In Lacs)

flows

from

long-term Year 0 Year 1

funds Year 2

point Year 3

of Year 4

view: Year 5

Initial cash flow Operating cash flows: (+) PAT (+) Interest on term loan (1-T) (+) Depreciation (+) Preliminary expenses written off () Increase in WC margin Terminal cash flows: (+) Net salvage value of fixed assets (+) Net salvage value of WC* margin Total

(4192.44) 254.22 126.00 367.55 10.64 0.00 434.93 126.00 367.55 10.64 31.94 505.12 100.80 367.55 10.64 20.15 542.83 80.64 367.55 10.64 8.30 592.35 56.45 367.55 10.64 8.69

2184.86 185.68 (4192.44) 758.41 907.19 963.97 993.36 3388.84

Assumption that increases in margin money will be met out of internal cash accruals.

 Terminal value of land is considered as Rs.142.72 Lacs Terminal value of Buildings, Plant and Machineries as well as the Miscellaneous Fixed Assets is obtained as : (Rs. In Lacs) Building & Civil Works Plant & Machinery Miscellaneous Fixed Assets Less : Total Depreciation
480.44 3372.71 26.75 3879.90 1837.75

2042.14

Net salvage value of fixed assets = Rs.142.72 Lacs + Rs.2042.14 Lacs = Rs.2184.86 Lacs

4.

a.

Cost of equity Tax rate = 30%

= 13%

Cost of debt = 9%
2000 (4192.44 2000) 9 0.70 + 13 4192.44 4192.44

Weighted average cost of capital = = 9.80 percent.

(i) The required NPV may be calculated as: =

758.41 907.19 963.97 993.36 3388.84 + + + + 1.098 (1.098) 2 (1.098) 3 (1.098) 4 (1.098) 5 4192.44 +

= 4192.44 + 690.72+ 752.48+ 728.21 + 683.43+ 2123.44 = Rs. 785.84 Lacs. (ii) Terminal value of intermediate cash flows @ 6.00 percent = 758.41 (1.06)4 + 907.19 (1.06)3 + 963.97 (1.06)2 + 993.36 (1.06) + 3388.84 = Rs.7562.87 Lacs Modified IRR may be calculated from: where, TV = Terminal value k n = Life of the project IO
TV IO (1 + k) n

=0

= Modified IRR = Initial outlay

Then

Terminal value IO = 0 (1+k)5 7562.87 4192.44 = 0 (1 + r)5

7562.88 4192.44
1/ 5

or,

or, (1 + r) =

or, r = (1.1252 1) or, r = 12.52 percent. As the modified IRR is more than the cost of capital, so the project may be recommended.

b.

Estimation of yearwise debt service coverage ratio: Year 1

PAT Depreciation Preliminary expenses Interest on term loan Principal Repaid DSCR
254.22 367.55 10.64 180.00 0.00

Year 2
434.93 367.55 10.64 180.00 400.00

Year 3
505.12 367.55 10.64 144.00 320.00

Year 4
542.83 367.55 10.64 115.20 384.00

Year 5
592.35 367.55 10.64 80.64 896.00

4.51

1.71

2.21

2.08

1.08

As we see from the above table that the expected DSCR is always more than unity, the project may be financed by the term lenders. It is also worth mentioning that since such a huge corpus of loan is being repaid in 4 installments starting at the end of the second year and a huge bullet payment in the fifth year, DSCR in the last four years is low but it never goes below unity. 5. There are three basic types of layouts : process layout, product layout and fixed position layout. Process Layout
In process layout, all machines are arranged according to the process or function they perform. For example, all drilling machines are arranged at one place, all lathe machines are arranged at another place, and all milling machines are arranged together at another place. As the arrangement is based on the function, this layout is also called functional layout. This layout is best suited for factories where production is intermittent (batch production) and different items of varied sizes and shapes are produced. In this layout, the workers will be confined to only one particular class of machines and will be able to acquire considerable skill in operating that type of machines. Therefore, they will be able to handle any type of job that requires that particular machines. Thus, the main advantage of this layout is its flexibility. On the other side of the coin, as the workers are conversant with only one particular type of machine, they sit idle when there is no work on that machine. This leads to avoidable labor costs.

Product Layouts

Product layouts are also called assembly lines. In this type of layout, all the machines are arranged in a line, and the sequence of the machines depends on the sequence of the operations to be performed for producing a particular product. The name assembly lines is because such layout is most frequently used for assembling operations. The term product layout arises from the fact that the layout is based on the operations required for a particular product. This layout is suitable for producing items of mass production or repetitive production processes for which the demand is stable and the volumes are high enough. The main advantage of this type of layout is that the production process is highly efficient and easy to operate and control. The main disadvantage is this layout is highly inflexible. A major change in the design of the item to be produced calls for rebuilding the entire assembly line Fixed Position Layout This type of layout is used when the item to be produced is fragile, or too bulky to move around. For example, it is used in ship building, aircraft building, etc. In this layout, the item being produced remains at a fixed location all through the production process while men and machines are moved from place to place. The workers will be highly specialized in the tasks they have to carry out. Often, the machines used are leased, as they are used for very short periods. The main advantage, obviously, is that large structures that cannot be processed in process or product layout can be handled in this layout
What we have seen until now is basically the arrangement of machines that are actually required for the processing done in a factory. But along with the layout of machines, the layout of all the other paraphernalia should also be decided: the layout of the transportation facilities, communication systems, utilities like water and power, etc. Specifically, the most important layouts, other than the plant layout that have to be decided in advance are:

General Functional Layout: In this layout, the relationship of the buildings and civil works and the equipments is shown. This layout is designed in such a way that the entire process of receiving raw materials, processing and the outward movement of the finished goods takes place smoothly and efficiently. ii. Transport Layout In this layout, the distances between various facilities outside the production line and the modes of transport between them are shown iii. Utilities Layout: The points of availability and consumption of each utility at each point are shown in this layout. iv. Communication Layout: It shows the communication lines between the various divisions the mode (say telephone lines) and their numbers. v. Organizational Layout: The number of people required, their requirement at each part of the project site, and their hierarchical relationship are shown in this layout. All layouts are designed before starting construction and installation of the machinery. They greatly facilitate installation of machinery and other facilities

i.