CASE STUDY 5 Me. US. Shah, a first generation entrepreneur planned for putting up a small seate industrial nit With an investment on fixed assets of Rs. 40.00 lakhs, in the year 1987, forthe manutacture of poly propstene tags (PP. bags). The breakup of the investment on fived assets proposed fs as ude (Rs. in Takhy) Land: 1,00 Building | 10.00 Plant & Machinery © 25.00 Machinery Erection Charges © 2.00 Electricals. 2.00. — 40.00 imported from abroad. Though the raw material Ik quantities as the foreign The raw material vir. PP. granules was to be ‘as available freely from abroad, it was possible to import only in bull Tupplicrs entertained only bulk orders. The minimum bulk quantity that could be imported would deere raw material requirements of the unit for @ months, As Shah was a first generation Cotreprencur with only a moderate financial suppor, he could aot afford to import the raw materat tn auch bulk quantities. Instead, he proposed to buy the raw materials from local dealers in smatt Guantves that are sufficient (0 meet his weekly requirements, The imported raw material was also aevable for sale in small quantities from local dealers, though the price was higher by about 20% Nevertheless, Mr. Shah decided to go ahead with the project, as his calculations showed that he ould still make a profit in spite of the higher price charged by the local dealers of raw materials Fie gota term loan sanctioned by bank for the purchase and erection of machinery and electricals and he opted to invest own funds for the purchase of land and construction of building, Mr. Shah fought the land already identified by him by investing his capital and also started constructing the building. The buikding was completed by about SO% and investment of around Rs. 6.00 lakhs wasalready made. To his surprise Mr. Shah came to know that the local dealers of raw material have risen their price by another 20% due to reasons best known to them. He reworked his financials and found that the financial viability of the project would suffer due to increased cost of raw materials. He reworked his calculations on the import of raw material in bulk which proved to be a better option under the changed circumstances. Since the construction of building was underway, he was not prepared to give up his life-time ambition midway. He approached his banker for the sanction of working capital facilities towards the import of raw materials. The banker, though reluctant at the beginning (in view of the reason that bulk import will lead to holding up a huge inventory which is not a healthy investment practice) finally agreed to finance for the import of raw materials on condition that the finance would be restricted to 50% of the import bill and that the balance 50% of the investment on raw Materials should be bome by the promoter. Mr. Shah breathed a sigh of relief after the banker sanctioned financial assistance for the import of raw material in bulk. The construction of building was nearing completion and Mr. Shah was busy finalizing orders for the procurement of machinery. One fine morning as he was glanzing through the pages of newspaper he happened to come across a news item that read : “Government contemplates banning of P.P bags as disposal of P_P. bag: create health hazards”. Mr. Shah was in a fix. (1) Discuss the case and offer your comments. (2) What is the next logical step that in your opinion, Mr. Shah should have taken under the given conditions?