What to do?

Mr. Ram Bahadur, a 60 years old man, had served the Indian Army for 35 years and retired after that. He
stays at Khanpur New Delhi with his family members. His wife is a B.Com. Graduate from Agra
University, but thought to look after the family in absence of Mr. Bahadur. He has two sons. Both of
them had completed B. Tech from Maharaja Agrasen University. He received almost ₹ 97 lacks after
retirement from his Provident fund account and many other facilities, like leave encashment etc. He was
thinking about spending his remaining time at home. He was also not able to decide what he will do with
his money which he has received. He was thinking some alternatives:

– To deposit all amount in savings bank account of a bank and withdraw interest from it.

– To Purchase a house and get rental income from it.

– To start a business.

In first alternative he will not get more than 3-4% interest on the whole amount per annum. Inflation
rate of the country is around 5-6%. Hence his real income is negative. Second alternative is very
attractive because capital gain in real estate is very high. Rental income will also be not less than ₹
25000 – 30000 per month, which will increase every year.

Third alternative was equally attractive to him because his wife and sons can help him in his business.
His friend Mr. Udit Bansal has a retail chain in USA and he needs readymade shirts from a supplier. Wife
of Ram Bahadur is a trained shirt maker. Ram Bahadur has a vacate land adjacent to his house, which
can be used for factory purposes. He collected data, which are given below:-

• Mr. Udit Bansal wants 24000 shirts annually from Ram Bahadur.
• To supply the whole demand Mr. Bahadur has to install some swing machines. Each machine
can produce 1800 shirts annually. Hence he needs 14 machines. He needs three machines extra
because some machines may be stopped for maintenance purpose. Each machine costs ₹
50,000. Installation charges of the machine will be ₹ 3000 per machine.
• He needs raw material, which are available at local market.
• He has to build up a factory and for that he needs ₹ 10,00,000.
• Raw material cost for 1st year will be ₹13,00,000 to purchase raw materials.
• He will receive $ 5 for each shirt from him friend Udit Bansal. The rates will be unchanged for 15
years from the starting of the business.
• Payment will be made in cash. There will not be any credit sales.
• There are 14 working machines hence he needs minimum 14 people to work in one shift every
day for 8 hours, which is sufficient for required production.
• Everybody will be paid ₹ 10,000 per month.
 • Leave etc will be there hence he has to keep 17 people.
• There will be another one person per machine who will cut the cloth according to size of the
shirt.
• Suppliers will supply the cloth at the door step hence Ram Bahadur need not to be worried.
• All machines will be run by electricity only hence the amount of electricity bill will be around ₹
10,00,000 per month, which include other lighting and fixing charges.
• Maintenance charges will be around ₹ 10,00,000 per month.
• Transport cost of finished goods from factory to airport will be almost Rs. 1,00,000 per month.
Mr. Ram Bahadur is assuming that
1. Salary of employees has to increase every year and this may be 10%.
2. Raw material cost may increase by 0.05% every year from initiation.
3. Exchange rate may increase by almost 3% every year.
4. Electricity cost may increase by 1% every year.
5. Transport cost may increase by 1%
6. Tax rate is 30%
7. Ram Bahadur is expecting a return of 30% from his investment.
8. Depreciation will be in straight line method.
9. Life of the project will be 15 years.
Some scenarios may occurred in the business
Scenario-1 (Optimistic situation)
a. Salary of employees may increase by 2% every year.
b. Raw material cost may increase by .06%
c. Exchange rate may increase by 4%
d. Electricity cost may not increase.
e. Transport cost may increase by 2%
Scenario-2 (Pessimistic situation)
a. Salary of employees may increase by 0.05% per annum.
b. Raw material cost may increase by 0.02%
c. Exchange rate may increase by 5%
d. Transport cost may increase by .05%
Case Question
Should Mr. Ram Bahadur start the business?
Calculation

Machine cost =(14+3)*50000 = 8,50,000

Salary =( 14+3)*2*10000=34*10000=340000 per month, Annual Salary = 340000*12=40,80,000

This will be for the first year. As salary is increasing at the rate of 1% per year hence the next year’s
salary will be 4080000*(1+.01)=4120800

Raw material cost for 1st year will be 13,00,000, but from the 2nd year onwards is 13,00,000*(1+.0005%)

Sales 24000*$5=$1,20,000. Exchange rate is 69.7994. Hence sales is Rs. 8375928. This is first year sales.
As exchange rate is increasing at 3% hence exchange rate in the 2nd year will be 69.7994*(1+0.03) =
71.89338. Hence sales of 2nd year will be 120000*71.89338=8627206

Electricity charges presently is 6,00,000 but it will increase at the rate 1%. Hence next year electricity
charges will be 6,00,000*(1+.01)

Transport cot presently is Rs. 60000, but in the next year it will be 60000*(1+0.01)

Fixed cost is Factory cost + Machine cost = 10,00,000+8,50,000=18,50,000

Depreciation =1850000/15 = 123333.33