CASE STUDY ON FINANCIAL FORECASTING

THE EASWAR ENGG. PRODUCTS TESTING

EQUIPMENTS PVT. LTD
X, Y & Z all the three qualified and experienced engineers have decided to form a Private
limited company to manufacture special testing equipments for testing engineering goods.
The operational reliability of engineering products could be evaluated only when tested
under simulated conditions of temperature, humidity and vibrations as experienced
under actual working conditions.

MARKET

According to statistical data, imports of such testing equipments have been to the order
of roughly Rs. 50 crores per year. In the next five years, the market demand for the
product is expected to grow at the rate of 10% per annum. The product is stated to be
presently manufactured by 2 units in the country. It will, therefore, have good scope for
the product in local market. due course. Taking into account the market demand the
selling price per unit is estimated by the promoters at Rs. 5 lacs.

2. COST OF PROJECT AND MEANS OF FINANCE

Cost of Project (Rs. in lacs)

1. Land 0.50
2. Building 2.50
3. Machinery including installation
& electrification 25.00
4.Other machinery 2.50
5. Preliminary expenses 0.25
6. Provision for contingencies 2.00
7. Margin for working capital 6.00

Total 38.75

Means of finance
1. Share Capital 14.75
2. Deposits for 5 years @ 15% interest 4.00
3. Term Loan from Bank/SFC 20.00

Total 38.75
ii) Staff and labour

A) Factory Labour
Year No. of workers Average rate Total
per day of wages per wages
worker (Rs) (Rs. lacs)
I 14 60.00 2.52
II 16 60.00 2.82

III 20 60.00 3.60

B) Administrative Staff: Estimated Rs. 3 lacs per annum

iii) Other Expenses (Rs.i n lacs)

I II III
a) Stores 0.75 0.95 1.15
b) Consumable spares 0.50 0.50 0.50
c) Power & fuel 1.50 1.50 1.80
d) Repairs & maintenance 0.25 0.25 0.30
e) Rent, taxes etc. 0.50 0.50 0.50
f) Postage & stationary 0.50 0.55 0.60
g) Advertisement 0.75 0.75 0.75
h) Travelling expenses 0 .60 0.60 0.60
I) Other expenses 0.40 0.40 0.40

Total 5.75 6.00 6.60

4. TECHNICAL ASPECTS
I) Raw Materials
The raw materials required for the manufacture of the product
consist of compressor, indicator bridge, condenser, steel sheets,
vacuum pump, thermostatic valve etc. The cost of all such materials
work out to Rs. 3 lacs per unit of finished product.

The installed capacity of the plant is 30 units per annum. The

operating capacity of the plant has been estimated to be 12, 15 and 20
units for the first, second, and third years respectively. From the
fourth year onwards, the capacity has been assumed to be 20 units
per annum. The factory will work for 8 hours per day on average
and the total number of working days for the year will be 300.
Depreciation
On building @ 5% per annum
On machinery @ 10% per annum
To be provided on straight line basis

iv) Interest on borrowings:

On term loan @ 15% per annum

On working capital @ 16% per annum

v) Income tax liability has been estimated at 30% of net profit

( after depreciation)

vi) Estimation of working capital requirements

a) Raw material and stores 3/4 months

b) Stock-in-process 1 month
c) Finished goods 1 month
d) Receivables 1..5 month

Bank finance will be available up to (a) 75% on raw materials and

stores (b) 75% on Stock-in-process (c) 75% on finished goods and
(d) 90 % on receivables.

The unit has approached the SFC/ Bank for the term and working
capital requirements. It is proposed to repay the term loan in 10 half
yearly instalments of Rs. 2 lacs each with a moratorium of 6 months

Work out for 3 years

1) Working capital requirement limit

2) Profit and loss account statements

3) D. S. C. R.