CASE : IDENTIFYING A GOOD PROJECT By J.M.

Pant, Management Consultant

As a young MBA with specialization in Entrepreneurship, you have received three projects from Vikram Singh who seeks your assistance in identifying the best project out of the three projects selected by him. Vikram is an ex army Major and wants to start his own venture in Ambala (Haryana) where his parents are living. He wants to earn net amount of Rs 20000 per month in first year and earn at least Rs 50000 per month from third year onwards, after payment of loan instalments and interest, and taxes, if any. He can put in Rs 15 lakhs as his share in the enterprise, and if required can raise another Rs 10 lakhs from his friends and relatives. These friends and relatives will demand a fixed return of 25% on the invested amount and repayment of principal after 5 years.Vikram has just retired from Army and has no civilian experience. The three projects which he has shortlisted are as under: 1. Paints. Capacity 500 tons (1 ton=1000kg). Sales Value Rs 60 lakhs per year in the first year. And Rs 90 lakhs in second year, and third year at full capacity. Land 500 sq.m. at Rs 1000 per sqm. Building 2500 sq ft covered area at Rs 600 per sq ft construction. Plant and machinery cost Rs 25 lakhs. Miscellaneous assets of Rs 3 lakhs (office equipments, DG set, water supply, fire fighting). Staff and labour expenses Rs 70000 per month for 10 persons. Raw material cost at Rs 16 per Kg of paint. Utilities i.e power, water cost Rs 15000 per month. Other factory and administrative expenses Rs 30000 p.m. Marketing expenses at 10% of sales. Interest at 16% on term loans and working capital. Working capital needs to be provided at 3 months of sales. Bank will provide loans upto 75% of total working capital. Long term debt at a debt equity ratio of 2:1.Depreciation of Rs 3 lakhs per year. If land and building are rented, the rent in that area will be Rs 25000 per month. A budget of Rs 1 lakh towards preliminary and preoperative expenses is provided.Contingency provision of Rs 1 lakh. Selling price Rs 30 per Kg. No credit on material will be provided. 2. Steel furniture. Items like cupboard, racks, chairs, tables, wastepaper baskets etc. Capacity in terms of Rs 200 lakhs worth of furniture per annum. Covered area required 1000 sq ft. Plant and machinery Rs 12 lakhs. Staff and labour expense Rs 100,000 per month for 14 persons. Raw materials Rs 10 lakhs per month at full capacity. Utilities at Rs 10000 per month, other expenses Rs 15000 per month. . Marketing expenses at 10% of sales. Interest at 16% on term loans and working capital. Working capital needs to be provided at 3 months of sales. Bank will provide loans upto 75% of total working capital. Long term debt at a debt equity ratio of 2:1.Depreciation of Rs 1.7 lakhs per year. If land and building are rented, the rent in that area will be Rs 25000 per month. A budget of Rs 1 lakh towards preliminary and preoperative expenses is provided.Contingency provision of Rs 1 lakh. No credit on material will be provided. Capacity utilization 50%, 80% and 100% in the first three years respectively. 3.Barbed wire. Used for fencing/protection. Capacity 100 tons per month, selling price at Rs 30000 per ton. Space on rent at Rs 50000 per month, security for leased premise equal to 6 months of rent. Plant and Machinery Rs 30 lakhs. Wages and Salaries of 20 persons Rs 1,40,000 per month. Raw materials Rs 20000 per ton. Various expenses Rs 15000 per month. Interest at 16% on term loans and working capital. Working capital needs to be provided at 3 months of sales. Bank will provide loans up to 75% of total working capital. Long term debt at a debt equity ratio of 1.5:1.Depreciation of Rs 3 lakhs per year. A budget of Rs 0.8 lakh towards preliminary and preoperative expenses is provided.Contingency provision of Rs 2 lakhs. No credit on material will be provided. Capacity utilization 60%, 80% and 100% in the first three years respectively. POINTS FOR DISCUSSION (You can make suitable assumptions) 1. On basis of rough estimates and calculations, which project appears to be the best? 2. Will these projects meet the expectations of Vikram ? What advice you will give to Vikram Singh? 3. What more information must Vikram Singh collect to further refine his project plan?

Prepared by J.M.Pant, Management Consultant