Project Finance

Case : Vamshi Rubber Ltd.

Vamshi Rubber Limited, incorporated on 24 th November, 2007, as a Public Limited Company in
Collaboration with Hercules Tire and Rubber Co., is setting up a project for the manufacture of
procured tread rubber and its associated products at Lingojiguda Village, Choutuppal Mandal,
Nagaland District in Andhra Pradesh. It is the proposed to manufacture tread rubber with a capacity of
3200 tonnes per, annum, Cushion gum with a capacity of 400 tonnes per annum and vulcanizing
solution with a capacity of 400 tonnes per annum.
Project particulars
The Company has purchased 3.94 acres of land at a cost of Rs.21.00 lakhs. The site development is
estimated to be Rs.8.68 lakhs.
The civil works of the company mainly consists of the process shed where the rubber is mixed in an
inter mix, extrusion and pressing shed. The area of the process sheds about 418 sq. mtrs and that of
extrusion shed is 1003 Sq. Mtrs. The other important buildings are finished goods store (167Sq. Mtrs),
boiler shed (81 Sq. Mtrs), Power Room (80 Sq. mtrs), Office Block (125 Sq.Mtrs), Staff Quarters (607
Sq. Mtrs). The total expenditure towards building and civil works is estimated to be Rs.104.32 lakhs.
The total of plant and machinery is estimated to cost 218.36 lakhs. Necessary provision has also been
made for foundation and erection of the equipment to an extent of Rs 3.64 lakhs. The entire equipment
required for the project is being procured from indigenous sources.
The company has provided for furniture and fixtures, office equipment, electrical equipment, delivery
van, tread cooling line, boiler, oil storage tanks, lab equipment, etc. the company has also provided for
two retreating centers, one at Hyderabad and the other in the North at Delhi. The total cost of all these
miscellaneous fixed assets estimated to be Rs.167 lakhs. Preliminary and pre-operative expenses
amount to Rs.21 and Rs. 64 lakhs respectively.
Assumptions to be made in working out the Profitability Projections:
1.
2.
3.
4.

5.
6.

Working Days: The working days have been assumed to be 300.

Operating Capacity: The operating capacity is worked out at 60% in the first year, 70% in
the second year and 80% from third year onwards.
Selling Price: The selling price of Tread Rubber is taken at Rs.47,000 per tonne, Cushion
Gum at Rs.54,000 per tonne and Vulcanizing Solution a Rs.46,000 pr tonne.
Raw Materials: The raw materials required for the manufacture of rubber are mainly natural
rubber, synthetic rubber, carbon black and some chemicals. All the raw materials are
available indigenously and without any difficulty. The cost of raw materials pr tonne
including process loss at 1% works out to Rs.32,097 for Procured Rubber, Rs.32,570 for
Cushion Gum and Rs.16,656 for Vulcanizing Solution.
Consumables: The cost of consumables per tonne of the finished product is estimated at
Rs.1,000.
Power: The annual requirement of power is estimated at 750 KVA. Taking into account
demand charges at Rs.75 per KVA per month and power charges at Rs.2.15 per unit the

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8.
9.
10.
11.

12 .
13 .
14 .
15 .
16 .
17.
18.

total cost of power works out Rs.64,49,040 from fourth year onwards. It is also expected
that the unit gets power rebate at 25% for the first three years.
Fuel: Requirement of the fuel is taken at the rate of 42 kg per hour based on 20 hours per
working day. Rate per tonne is Rs.8,015. In respect of first year and second year the
number of working hours per day is assumed at13 and 16 hours respectively.
Repairs & Maintenance is estimated at 2% and 2.5% of gross block of Plant & Machinery
for the first 2 years of operation and 3% from the third year onwards.
Depreciation has been provided on Straight Line Method at the rate of 3%, 11% and 3.34%
on building, plant and machinery and MFA. However, income tax is computed on the basis
of depreciation rates of 10%, 25% and 10% respectively.
The rate of interest is assumed to be
a. 17.5% p.a. for term loan and
b. 16% for working capital.
Working Capital is arrived at taking into consideration the following inventory
norms and as appraised by Bank of Baroda:
Bank Finance
Raw Materials
1 month
75%
Consumables
1 month
75%
Stock in Process
1 month
75%
Finished Goods
1 month
75%
Receivables
1 month
75%
Expenses
1 month
0%
Wages and Salaries in the third year have estimated to be Rs.24 lakhs and
Rs.35
lakhs respectively. Every year from the fourth year onwards, wages and salaries are
expected to increase by 5%.
Administration and Selling Expenses are estimated to be 2% and 1% of sales respectively.
Term loan would be repaid in 24 quarterly installments starting from the beginning of the
third year.
Dividends of 8% and 15% are expected to be declared in the 1 st and 2nd year, and 20%
from the 3rd year onwards.
Contingency Projections: 5% on utilities, wages, repair and maintenance. 5% on building
and miscellaneous fixed assets; 10% on Plant and Machinery.
Tax rate 35%
Term Loan available Rs. 312 Lacs.
Public Issue : 28% of project costs
Promoters Contribution : Rest of the requirements

Required : Calculate I) Cost of project, ii) Means of finance iii) Projected profitability
iv) Projected cash flows & iv) Projected Balance sheet
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( By Prof Vivek Date Aug12)