PART 1

Question 1: How was feasibility study done? User needs, broad economic feasibility, cash flows, capital expenditure, estimated return on investment
Tata Motors is now working on a feasibility study in setting up shop in Indonesia to produce the Tata Nano. Chairman of the Investment Coordinating Board (BKPM), Gita Wirjawan said, "The feasibility study has been commenced by them." In regards to Tata Motors' proposal he said "I am bullish that India could also become one of the top five biggest investors." "The mother of Indian industries, Tata Motors, has arrived, so it will drive many more investments from India,"

Sources had previously said that Tata Motors was looking at production of 50,000 Nanos from 2013 at a plant on the outskirts of Jakarta. The cars would be sold in Indonesia, Philippines, Thailand, and Malaysia. Launched in the Indian car market in 2009 with its 'it can't get lower' price tag of $2,500', the Tata Nano is likely to be priced at $5,200 in Indonesia.

There is no clarity regarding Tata Motor's investment in Indonesia but it's likely that the Indonesian government offers tax incentives keeping in mind the impact such an investment can have on the manufacturing industry. In response, Head of corporate communication at Tata Motors, Debasis Ray said, "We have said in the past that Tata Motors has all along been conscious that the Tata Nano, as launched in India, will be appropriate for other countries as well." "The Tata Nano will be, over time, marketed in other relevant countries," he said, without specifically mentioning Indonesia." "Given its small size and maneuverability, it is, rather, the solution for busy roads." "Given that trend, it should be welcomed if they choose to buy a car that is small in size and more maneuverable and environment-friendly than large cars."

In 2010, Indonesia was second-biggest car market in the Asean region, and fell Thailand by just a few thousand vehicles. It is believed that Indonesia will produce two million cars in 2020. At the Tata Motors front, the company recently began exporting the Tata Nano to Nepal and Sri Lanka.

Question 2: What were important issues in financing of the project?

Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value[1] while managing the firm's financial risks. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, short term decisions deal with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers). Capital investment decisions Capital investment decisions[2] are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. (1) Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present valuewhen valued using an appropriate discount rate in consideration of risk. (2) These projects must also be financed appropriately. (3) If no such opportunities exist, maximizing shareholder value dictates that management must return excess cash to shareholders (i.e., distribution via dividends). Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision. The investment decision Management must allocate limited resources between competing opportunities (projects) in a process known as capital budgeting.[3] Making this investment, or capital allocation, decision requires estimating the value of each opportunity or project, which is a function of the size, timing and predictability of future cash flows. Project valuation In general,[4] each project's value will be estimated using a discounted cash flow (DCF) valuation, and the opportunity with the highest value, as measured by the resultant net present

value (NPV) will be selected (applied to Corporate Finance by Joel Dean in 1951; see also Fisher separation theorem, John Burr Williams: theory). This requires estimating the size and timing of all of the incremental cash flows resulting from the project. Such future cash flows are then discounted to determine their present value (see Time value of money). These present values are then summed, and this sum net of the initial investment outlay is the NPV. See Financial modeling. Valuing flexibility n many cases, for example R&D projects, a project may open (or close) various paths of action to the company, but this reality will not (typically) be captured in a strict NPV approach.[6] Management will therefore (sometimes) employ tools which place an explicit value on these options. So, whereas in a DCF valuation the most likely or average or scenario specific cash flows are discounted, here the flexible and staged nature of the investment is modelled, and hence "all" potential payoffs are considered. The difference between the two valuations is the "value of flexibility" inherent in the project. The two most common tools are Decision Tree Analysis (DTA)[7][8] and Real options analysis (ROA);[9] they may often be used interchangeably:

DTA values flexibility by incorporating possible events (or states) and consequent management decisions. (For example, a company would build a factory given that demand for its product exceeded a certain level during the pilot-phase, and outsource production otherwise. In turn, given further demand, it would similarly expand the factory, and maintain it otherwise. In a DCF model, by contrast, there is no "branching" each scenario must be modelled separately.) In the decision tree, each management decision in response to an "event" generates a "branch" or "path" which the company could follow; the probabilities of each event are determined or specified by management. Once the tree is constructed: (1) "all" possible events and their resultant paths are visible to management; (2) given this knowledge of the events that could follow, and assuming rational decision making, management chooses the actions corresponding to the highest value path probability weighted; (3) this path is then taken as representative of project value. See Decision theory: Choice under uncertainty.

ROA is usually used when the value of a project is contingent on the value of some other asset or underlying variable. (For example, the viability of a mining project is contingent on the price of gold; if the price is too low, management will abandon the mining rights, if sufficiently high, management will develop the ore body. Again, a DCF valuation would capture only one of these outcomes.) Here: (1) using financial option theory as a framework, the decision to be taken is identified as corresponding to either a call option or a put option; (2) an appropriate valuation technique is then employed usually a variant on the Binomial options model or a bespoke simulation model, while Black Scholes type formulae are used less often; see Contingent claim valuation. (3) The "true" value of the project is then the NPV of the "most likely" scenario plus the option value.

Quantifying uncertainty Given the uncertainty inherent in project forecasting and valuation,[8][10] analysts will wish to assess the sensitivity of project NPV to the various inputs (i.e. assumptions) to the DCFmodel. In a typical sensitivity analysis the analyst will vary one key factor while holding all other inputs constant, ceteris paribus. The sensitivity of NPV to a change in that factor is then observed, and is calculated as a "slope": NPV / factor. For example, the analyst will determine NPV at various growth rates in annual revenue as specified (usually at set increments, e.g. -10%, -5%, 0%, 5%....), and then determine the sensitivity using this formula. Often, several variables may be of interest, and their various combinations produce a "value-surface",[11] (or even a "valuespace"), where NPV is then a function of several variables. See also Stress testing. The financing decision Achieving the goals of corporate finance requires that any corporate investment be financed appropriately.[13] The sources of financing are, generically, capital self-generated by the firmas well as debt and equity financing sourced form outside investors. As above, since both hurdle rate and cash flows (and hence the riskiness of the firm) will be affected, the financing mix will impact the valuation of the firm as well as long-term financial management decisions. There are two interrelated decisions here:

Management must identify the "optimal mix" of financingthe capital structure that results in maximum value. (See Balance sheet, WACC, Fisher separation theorem; but, see also the Modigliani-Miller theorem.) Financing a project through debt results in a liability or

obligation that must be serviced, thus entailing cash flow implications independent of the project's degree of success. Equity financing is less risky with respect to cash flow commitments, but results in a dilution of share ownership, control and earnings. The cost of equityis also typically higher than the cost of debt (see CAPM and WACC), and so equity financing may result in an increased hurdle rate which may offset any reduction in cash flow risk.[14]

Management must attempt to match the long-term financing mix to the assets being financed as closely as possible, in terms of both timing and cash flows. Managing any potentialasset liability mismatch or duration gap entails matching the assets and liabilities according to maturity pattern ("Cashflow matching") or duration ("immunization"); managing this relationship in the short-term is a major function of working capital management, as discussed below. Other techniques, such as securitization, or hedging using interest rateorcredit derivatives, are also common. See Asset liability management; Treasury management; Credit risk; Interest rate risk.

One of the main theories of how firms make their financing decisions is the Pecking Order Theory, which suggests that firms avoid external financing while they have internal financingavailable and avoid new equity financing while they can engage in new debt financing at reasonably low interest rates. Another major theory is the Trade-Off Theory in which firms are assumed to trade-off the tax benefits of debt with the bankruptcy costs of debt when making their decisions. An emerging area in finance theory is right-financing whereby investment banks and corporations can enhance investment return and company value over time by determining the right investment objectives, policy framework, institutional structure, source of financing (debt or equity) and expenditure framework within a given economy and under given market conditions. One last theory about this decision is the Market timing hypothesiswhich states that firms look for the cheaper type of financing regardless of their current levels of internal resources, debt and equity. Working capital management Decisions relating to working capital and short term financing are referred to as working capital management.[16] These involve managing the relationship between a firm's short-term assets and

its short-term liabilities. In general this is as follows: As above, the goal of Corporate Finance is the maximization of firm value. In the context of long term, capital investment decisions, firm value is enhanced through appropriately selecting and funding NPV positive investments. These investments, in turn, have implications in terms of cash flow and cost of capital. The goal of Working Capital (i.e. short term) management is therefore to ensure that the firm is able to operate, and that it has sufficient cash flow to service long term debt, and to satisfy both maturing short-term debt and upcoming operational expenses. In so doing, firm value is enhanced when, and if, the return on capital exceeds the cost of capital; SeeEconomic value added (EVA).

Question 3: Which sources of finance were possible to be availed of / used by the organization?
Often the hardest part of starting a business is raising the money to get going. The entrepreneur might have a great idea and clear idea of how to turn it into a successful business. However, if sufficient finance cant be raised, it is unlikely that the business will get off the ground. Raising finance for start-up requires careful planning. The entrepreneur needs to decide:

How much finance is required? When and how long the finance is needed for? What security (if any) can be provided? Whether the entrepreneur is prepared to give up some control (ownership) of the start-up in return for investment?

The finance needs of a start-up should take account of these key areas:

Set-up costs (the costs that are incurred before the business starts to trade) Starting investment in capacity (the fixed assets that the business needs before it can begin to trade) Working capital (the stocks needed by the business e.g. r raw materials + allowance for amounts that will be owed by customers once sales begin)

Growth and development (e.g. extra investment in capacity)

One way of categorising the sources of finance for a start-up is to divide them into sources which are from within the business (internal) and from outside providers (external). TATA NANO can go for various source of finance that can be as fallows Internal sources The main internal sources of finance for a start-up are as follows: Personal sources These are the most important sources of finance for a start-up, and we deal with them in more detail in a later section. Retained profits This is the cash that is generated by the business when it trades profitably another important source of finance for any business, large or small. Note that retained profits can generate cash the moment trading has begun. For example, a start-up sells the first batch of stock for 5,000 cash which it had bought for 2,000. That means that retained profits are 3,000 which can be used to finance further expansion or to pay for other trading costs and expenses. Share capital invested by the founder The founding entrepreneur (/s) may decide to invest in the share capital of a company, founded for the purpose of forming the start-up. This is a common method of financing a start-up. The founder provides all the share capital of the company, retaining 100% control over the business. The advantages of investing in share capital are covered in the section on business structure. The key point to note here is that the entrepreneur may be using a variety of personal sources to invest in the shares. Once the investment has been made, it is the company that owns the money provided. The shareholder obtains a return on this investment through dividends (payments out of profits) and/or the value of the business when it is eventually sold.

A start-up company can also raise finance by selling shares to external investors this is covered further below. External sources Loan capital This can take several forms, but the most common are a bank loan or bank overdraft. A bank loan provides a longer-term kind of finance for a start-up, with the bank stating the fixed period over which the loan is provided (e.g. 5 years), the rate of interest and the timing and amount of repayments. The bank will usually require that the start-up provide some security for the loan, although this security normally comes in the form of personal guarantees provided by the entrepreneur. Bank loans are good for financing investment in fixed assets and are generally at a lower rate of interest that a bank overdraft. However, they dont provide much flexibility. A bank overdraft is a more short-term kind of finance which is also widely used by start-ups and small businesses. An overdraft is really a loan facility the bank lets the business owe it money when the bank balance goes below zero, in return for charging a high rate of interest. As a result, an overdraft is a flexible source of finance, in the sense that it is only used when needed. Bank overdrafts are excellent for helping a business handle seasonal fluctuations in cash flow or when the business runs into short-term cash flow problems (e.g. a major customer fails to pay on time).

Share capital outside investors For a start-up, the main source of outside (external) investor in the share capital of a company is friends and family of the entrepreneur. Opinions differ on whether friends and family should be encouraged to invest in a start-up company. They may be prepared to invest substantial amounts for a longer period of time; they may not want to get too involved in the day-to-day operation of the business. Both of these are positives for the entrepreneur. However, there are pitfalls. Almost inevitably, tensions develop with family and friends as fellow shareholders. Business angels are the other main kind of external investor in a start-up company. Business angels are professional investors who typically invest 10k - 750k. They prefer to invest in

businesses with high growth prospects. Angels tend to have made their money by setting up and selling their own business in other words they have proven entrepreneurial expertise. In addition to their money, Angels often make their own skills, experience and contacts available to the company. Getting the backing of an Angel can be a significant advantage to a start-up, although the entrepreneur needs to accept a loss of control over the business. You will also see Venture Capital mentioned as a source of finance for start-ups. You need to be careful here. Venture capital is a specific kind of share investment that is made by funds managed by professional investors. Venture capitalists rarely invest in genuine start-ups or small businesses (their minimum investment is usually over 1m, often much more). They prefer to invest in businesses which have established themselves. Another term you may here is private equity this is just another term for venture capital. A start-up is much more likely to receive investment from a business angel than a venture capitalist

Question 4: How was the financing actually accomplished / done for the project?
The thing TATA did was they transferred the capital to NANO project by the other group companies of the parent company of TATA. They also saved lot of money by the following. We gather from press reports that Tata Motors have been driving hard bargains with the state governments to try and obtain as much subsidies as possible for the small car project. The subsidies they had obtained from West Bengal Government, as enumerated by the Economic Times of 25th September 2008, in an article "El Nano: A Perfect Storm" by Arvind Panagariya, are as follows -

a) land lease at throw-away prices (Rs 1,260/- only per acre per month) b) a soft loan of Rs 2 billion for 20 years at interest rate of 1% per annum c) concessional tariff of electricity at Rs 3 per kwh d) VAT waiver for some Rs 10 billion or so

e) subsidised rates of water, stamp duties and other infrastructural facilities at nil or very low costs.

A recent press report says that it has been claimed that the amount of subsidy works out to Rs 60,000 per car, which is as high as 60% of its retail selling price.

In fact the cost equation is so thinly balanced, even after grant of the above subsidies, that Tata Motors management rejected a proposal to shift the vendor site location from the plant site to just across the road on the ground that the additional costs will make the project unviable.

It has never been wise to depend for business viability solely on government grants and subsidies and short term tax incentives. Nano however is trying to go against this basic business philosophy.

Part 2: Question 1: How would you have made the risk assessment, risk management plan, including a) Risk categories & reasons thereof, b) Probability & impact matrix, c) Risk response plan for each of these two projects?
TATA NANO Credit unavailability: Further tightening of liquidity position and reduction in exposure to vehicle financing by banks/NBFCs would have an adverse impact on the automotive industry. Though in-house vehicle financing has been strengthened by the Company, it would be a challenge for the Company to fully offset the decrease in credit availability from outside sources. Interest rates hardening and other inflationary trends: Further hardening of consumer interest rates could have an adverse impact on the automotive industry. Increase in inflation could also have a negative impact on automobile sales in the domestic market. Fuel Prices: The international crude prices witnessed steep increase from price levels of $62 per barrel at the beginning to $100-110 per barrel towards the end of the fiscal. Further hardening of fuel prices would adversely impact the automotive sales.

Input Costs: Prices of commodity items like steel, non-ferrous and precious metals and rubber witnessed an upward movement, which was partially offset by the Companys cost reduction initiatives. The price of steel, in particular, has increased by 30% 35% in the last 24 months and is expected to further increase significantly in the coming year. Whilst the Company continues to pursue cost reduction initiatives, increase in price of input materials could have a negative impact on the demand in the domestic market and/or could severely impact the Companys profitability to the extent that the same are not absorbed by the market through price realization. Government Regulations: Stringent emission norms and safety regulations could bring new complexities and cost increases for automotive industry, impacting the Companys business. WTO, Free Trade Agreements and other similar policies could make the market more competitive for local manufacturers. Global Competition: India continues to be an attractive destination for the global automotive players. The global automotive manufacturers present in India have been expanding their product portfolio and enhancing their production capacities. To counter the threat of growing global competition, the Company has planned to bridge the quality gap between its products and foreign offerings while maintaining its low cost product development/sourcing advantage. Growing consumer awareness: Growing awareness amongst consumers is driving up expectations from automobile companies in terms of providing world class features and technology for which adequate price realization is not always possible. Growth in Mass Transit Systems: The domestic passenger vehicle demand could be impacted by the growth of road and rail based mass transit systems. However, the Company would benefit from the road based mass transit system due to its wide range of commercial passenger carriers.

Question 2: How the organizational behavior aspects (Organization structure, Integration of groups / teams / departments, Quality function deployment, Roles, Responsibilities, Authority, Influence & balance of power, conflicts & their resolution / elimination) resulted into a) Positive (Successes) & b) Negative (Failures) impact during project life cycle? Please explain for both projects.