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DHPL Case Study

DHPL is a small manufacturing firm that made ₹1,000 million in sales in 2019 with net profits of ₹76 million. The company is considering investing ₹250 million to expand manufacturing capacity. It is estimated the new equipment would generate ₹45-68 million annually for the first 8 years and ₹30 million for the last 2 years, then be sold for ₹55 million. The company needs to raise ₹200 million externally and has two loan options - a 14% annual loan from SBI or a 13.5% quarterly loan from a financial institution. A third option is leasing the equipment for an annual ₹43 million rental.

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285 views1 page

DHPL Case Study

DHPL is a small manufacturing firm that made ₹1,000 million in sales in 2019 with net profits of ₹76 million. The company is considering investing ₹250 million to expand manufacturing capacity. It is estimated the new equipment would generate ₹45-68 million annually for the first 8 years and ₹30 million for the last 2 years, then be sold for ₹55 million. The company needs to raise ₹200 million externally and has two loan options - a 14% annual loan from SBI or a 13.5% quarterly loan from a financial institution. A third option is leasing the equipment for an annual ₹43 million rental.

Uploaded by

cyclo tron
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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DIVYA HANDTOOLS PRIVATE LIMITED (DHPL)

DHPL is a small sized firm manufacturing hand tools. Its manufacturing plant is situated in
Faridabad. The company’s sales in the year ending on 31st March 2019 were ₹1,000 million
(₹100 crores) on an asset base of ₹650 million. The net profit of the company was ₹76 million.
The management of the company wants to improve the profitability further. The required
rate of return of the company is 14%. The company is currently considering an investment
proposal to expand its manufacturing capacity. The estimated cost of the new equipment is
₹250 million. It is expected to have an economic life of 10 years. The finance manager
forecasts that net cash inflows would be ₹45 million per annum for the first three years. ₹68
million per annum from year four to year eight and for the remaining two years ₹30 million.
The equipment can be sold for ₹55 million at the end of its economic life.
If the company decides to accept the project, it would need to raise external funds of ₹200
million as about ₹50 million internal funds are available. The company has the following
options of borrowing ₹200 million.
The company can borrow funds from State Bank of India (SBI) at an interest rate of 14% per
annum for 10 years. It will be required to pay equal annual instalments of interest and
repayment of principal. The managing director was wondering if it was possible to negotiate
with SBI to make one single payment of interest and principal at the end of 10 years (instead
of annual instalments)
A large financial institution has offered to lend money to DHPL at a lower rate of interest. The
institution will charge 13.5% per annum. The company will have to pay equal quarterly
instalments of interest and repayment of principal.
The financial institution has made yet another offer to the company. It can lease equipment
for capacity expansion at an annual rental of ₹43 million payable at the beginning of the year.
Discussion questions
1. What is the net profitability of the new equipment considering time value of money?
2. What is the annual instalment amount of SBI loan?
3. What is the amount of the single payment of interest and principal to SBI after 10
years?
4. Calculate the quarterly instalments of the financial institution loan.
5. Should the company borrow from SBI or the financial institution? Give reasons for
your choice.
6. Would you recommend borrowing from the financial institution or get the equipment
on lease? Show necessary calculations.

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