NEFA

Entrepreneurship Development Institute of India
PGDM – E & IEV, 2020-2022: Trimester: IV

Mid -Term Examination: New Enterprises Financing and Appraisal
Date: 24.09.2021 Duration: 1.5 Hours Total Marks: 30

Instructions:-
1. Each main-Question must be attempted on a fresh page
2. Leave decent margin on the Left and Right side.
3. Wherever Tables are required draw tables with rules/scales
4. Figures should be tagged with their units at appropriate places
5. While handling large figures, denote them as Rs Millions /Rs lacs/ Rs Cores etc. as may be appropriate.
6. In case the Question has inadequate data, please make necessary assumptions and proceed. Make sure to
record the assumptions at prominent places
Part - A
A-1. Capital cost of a new project is given below
Land & Buildings 15.00 Rs lacs
Plant and Machinery 85.00
Technical Know-how fees 20.00
Misc. Fixed Assets 10.00
Preliminary & Pre-op. Expenses 10.00
Provision for Contingencies 10.00
Working Capital Margin 15.00
Total 165.00
Since there is no foreign component in the cost of capital, the management of the company desire to have the
funding exclusively from domestic resources. This is a grass-root project being established by new group of
promoters. As per the prevailing MSME guidelines, this project would come under Medium scale industry. The
management would like to avail the maximum term loan so that owners funding is minimized. They also believe
that higher equity capital than necessary would tend to reduce the EPS of the company.
a. List the rules/norms used in arriving at the quantum of loan eligible to this type of project.
b. List the rule/norm that banks follow in arriving at the quantum of loan for similar projects
c. Based on the above guidelines and promoters’ interest suggest an optimum Means of finance to the project.
[1+1+4 Marks]
A-2. Sigma Machine-parts LLP is a firm making machine-parts for the textile machinery. Most of its production
was going as OEM supplies while a small segment, which were seconds in terms of quality, went to the grey
market. It made only one product which fetched a price of Rs 90 per unit (net of taxes). The raw material per unit
of production was Rs 35; cost of production was Rs 60 and the Cost of Goods Sold [COGS] per unit was estimated
at Rs 70.
The plant had a capacity of 36,000 units per annum. The Plant Manager stated that the raw material inventory
should be of 30 days while the receivables should be 45 days; the finished goods stock was never more than 7 days
while the production-cycle for the unit [from start of production to delivery into Finished goods inventory] was 10
days. Assume 20 days credit in material purchase. The production unit plans to operate at 40 % capacity in the first
year, 60 % in the second year and at 80 % thereafter.
a. List the ‘basis of valuation’ for each component [RM, WIP, FG, Receivables & Creditors] of Working
Capital
b. Compute the working capital requirement of the plant for the years Y1, Y2 and Y3. What will be the
eligible bank borrowing in each year?
[2+4 Marks]
Part - B
B-1.
a. Explain the concept of financial viability of a project. List 4 key parameters that help in establishing the
financial viability of a project.
b. Explain the concept of Sensitivity analysis in evaluating project. List some of the key indicators
considered for sensitivity analysis
[2+2 Marks]
B-2.
a. Explain/define breakeven analysis and its utility
b. In a project the breakeven level is observed to be at 60 % of its installed capacity. If the Entrepreneur
desires to have the breakeven level below 40 %, what strategic options he/she should pursue?
[1+3 marks]
B-3.
a. Explain the concept of DSCR and its utility.
b. In a given project the DSCR for years Y1, Y2, Y3 and Y4 are found to be 1.5, 1.2, 1.4, and 1.6
respectively. What are your comments on the situation?
c. In the above situation, if the Entrepreneur wants to improve the situation, what strategic options he/she
should pursue? [Increasing the selling price, capacity utilization and Revenues are ruled out.]
[1+1+3 Marks]
B-4
a. Explain the concept of IRR and its utility.
b. In a project the IRR is observed to be 15%. How do we decide whether this value is satisfactory or not?
c. If the Project Manager feels that the value of IRR needed to be higher, what strategic-options are available
to him/her to re-configure the project? [Minimum 4 options are expected]
[1+1+3 Marks]
***

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Entrepreneurship Development Institute of India

PGDM – E & IEV, 2020-2022: Trimester: IV

Date: 24.09.2021 Duration: 1.5 Hours Total Marks: 30

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