BC0150010 FM Project
BC0150010 FM Project
BC0150010 FM Project
SITUATION.
Submitted by
KRISHNA.B.A
BC0150010
Project Submitted to
Professor P. Kumaresan
Associate Professor of Commerce
APRIL 2018
DECLARATION
I KRISHNA.B.A, Register Number BC0150010, hereby declare that this project work
SITUATION.” has been originally carried out by me under the guidance and
National Law School, Tiruchirappalli - 620 009. This work has not been submitted either in
Place : Tiruchirappalli
2. STATEMENT OF PROBLEM
6. CONCLUSION
INTRODUCTION
Investment decisions are investment decisions are concerned with the question whether
adding to capital assets today will increase the revenues of tomorrow to cover costs. Thus
investment decisions are commitment of money resources at different time in expectation of
economic returns in future dates. 1 The factors affecting investment includes factors
contributing to an investment include, but are not limited to: capital on hand, projects or
opportunities available, general market conditions, and a specific investment strategy.2
Investment decisions shape the future of the organisation and also specify where the funds of
the organisation are to be invested for the benefit of the organisation. Investments are
generally done on new projects or assets. Investment decisions are made with respect to short
term assets or long term assets. Investment in short term assets is also called as working
capital management. 3 The investment in long term assets is called as capital budgeting
decisions.4 These decisions are big investments made by a person or a company after taking
into account its financial situation and other factors which adversely influence the investor or
managers decisions.
These decisions are taken after exercising prudence, caution and also involves some long
term plan in accordance to which such decisions are taken and the organisation may benefit
or be negatively affected by such decisions. Since these decisions decide the future course of
the business and also influence important decisions such as diversification and other such
growth opportunities, it should be made with vision and also prudence so as to ensure that the
future of the organisation is good.
1
Investment Decisions: Meaning, Need and Factors Affecting It, Economics Discussion (2016),
http://www.economicsdiscussion.net/investment-decisions/investment-decisions-meaning-need-and-factors-
affecting-it/21976 (last visited Mar 1, 2018).
2
Investment decisions, TheFreeDictionary.com, https://financial
dictionary.thefreedictionary.com/Investment+decisions (last visited Mar 1, 2018).
3
Investment Decision, BUSINESS JARGONS (2015), https://businessjargons.com/investment-decision.html (last
visited Apr 10, 2018).
4
Id.
THE PROBLEM
Mr. Nikhil wanted to start a small business of manufacturing rubber gloves for various
businesses such as construction, medicine and other such fields. He sees two machines which
will help him produce between 200 - 240 units per day. The first machine CHPG costs INR
6,75,000/- and the second machine CHPG S costs INR 7,75,000/- respectively.5 Mr. Nikhil
has to decide which machine to buy and also find out which machine is more profitable. Both
the machines produce on aggregate around 200-240 units per day. Mr. Nikhil consulted his
childhood friend Mr. Gupta, who is in the business for the past fifteen years and he said that
on an average the aforesaid machines will produce an average of 220 units per day and a
profit margin between 10% to 30% can be earned depending on the quality of the product.
Hence, Mr. Nikhil takes the decision to fix the profit percentage at 10% and produce a decent
quality product which is both of reasonable quality and price. The cost of making one glove
is INR 300/-. The profit margin fixes the selling price of a glove at INR 330. Profit is INR 30
per glove produced. The business was finally started on January 1st, 2013 and has functioned
till date. The depreciation is INR 87,500 for machine A and INR 95,000 every year for
Machine B in straight line method and tax is 30%.
5
plastic-gloves-making-machine.pdf, , https://pdf.indiamart.com/pdfim/?url=//5.imimg.com/data5/JT/OQ/MY-
5441350/plastic-gloves-making-machine.pdf (last visited Apr 13, 2018).
2016 3,36,900
2017 3,93,900
TOTAL PROFITS 14,01,000
In this case, we have to look at the efficiency and future value of investment which he has
made. Both the machines have to be examined separately in order to ascertain which one is
more efficient. There are three methods to ascertain which one is more profitable. Those
methods are:
Machine A
Net present value is used to find out the future value of the investment.
Machine A
Profits after Tax at 30% Profits after Tax and Profits after Tax
Depreciation Depreciation
1,07,500 32,250 75,250 1,62,750
1,66,600 49,980 1,16,620 2,04,120
1,45,600 44,580 1,04,020 1,91,520
1,66,300 49,890 1,16,410 2,03,910
2,66,500 79,950 1,86,550 2,74,050
Profits after tax Net Present Value for 10% Value of investment
1,62,750 0.909 1,47,940
2,04,120 0.826 1,68,603
1,91,520 0.751 1,43,831
2,03,910 0.683 1,39,270
2,74,050 0.621 1,70,185
TOTAL 7,69,829
MACHINE B
Profits after Tax at 30% Profits after Tax and Profits after Tax
Depreciation Depreciation
97,000 29,100 67,900 1,92,900
1,36,000 40,800 1,63,100 2,58,100
1,52,200 45,660 1,06,940 2,01,540
2,41,900 72,570 1,69,330 2,64,330
2,98,900 89,670 2,09,230 3,04,230
Profits after tax Net Present Value for 10% Value of investment
1,96,900 0.909 1,48,076
2,58,100 0.826 2,13,190
2,01,540 0.751 1,57,356
2,64,330 0.683 2,48,837
3,04,230 0.621 1,88,926
TOTAL 9,50,355
As we have ascertained the returns after tax for both the machines, we can easily use the internal rate
of return method which can be used to find out the profitability of the machines.
Machine 1 – HCPG
The average profits for machine HCPG is INR 2,07,270. The investment in the machine is INR
6,75,000.
In this case, this is a situation involving a person who has to choose between two machines HCPG and
HCPG S, which are used for manufacturing plastic gloves. It is well understood that the second
machine is used to produce a better quality product and hence there is a price variation of INR
1,00,000 between both these machines. These machines are used for producing plastic gloves which
can be used for different purposes. It is to analyse the profitability of both these machines from the
point of view of a new business. In this problem, Mr. Nikhil, the owner of the business enters into the
business on the advice his close friend and consultant Mr. Gupta. He has been assessing the options
between the two machines from the point of view of the value of his investments and the effect of his
investment decisions on his future and his business’s future.
He first used the Payback period method to find out the duration within which he can earn back his
investment in the machine and the business. It is understood that the first machine returns the
investment back in a period of 2 years and 11 months and 18 days while the second machine has a
payback period of 4 years 3 months and 22 days. So, it is clear that the chances of earning more
profits on the initial investment is high in the case of the first machine HCPG machine which
produces a normal quality of gloves. It must also be understood that the machines have a shelf life and
after a time they are subject to losing their use or becoming obsolete. Hence, it is imperative that a
machine is able to help the investor to earn maximum profits on his investment. The first one HCPG,
provides a greater chance of earning more profits on the initial investment. Hence, in terms of
payback period, the first machine will be preferred.
While looking at this investment from the point of view of future value of investment, the first
machine provides a profit of INR 94,829 while the second machine provides a return of INR 2,08,655.
The second machine is more profitable since it provides more profits on five years which is double the
returns on the HCPG (machine 1). Hence, we can conclude that on the basis of future value of the
investment the second machine HCPGS is more profitable as it provides a profit margin which is
twice that of the profits provided by the first machine.
In terms of Internal Rate of Return, the second machine is more profitable than the first one which
yields a profit of INR 32,096. The first machine HCPG, on the contrary shows a loss of INR 17,472.