CPIMR MFS Solution

Q:5 – 1)


Investment made by BOI Finance Ltd. = Rs. 24 Crores

Cost of capital for BOI Finance Ltd. = 16% ( i.e. 14% + 2% )

We assume that BOI Finance Ltd. will want to simply recover its cost of capital – 16% by the lease transaction. Further, the tenure of lease can be assumed to be 5 years. Suppose, BOI Finance Ltd. charges an annual lease amount of Rs. X, then –

X * PVIFA(16%, 5 years) = Rs. 24 Crores

Hence, X = 7.33 Crores

Thus, every year BOI will have to pay Rs. 7.33 Crores as lease payment. It will have to charge an annual amount of Rs. Y such that it earns a profit of 15%. Hence –

(Y – 7.33)*0.7 = 0.15*7.33

So, Y = 8.90 Crores

Thus, BOI will need to charge Rs. 8.90 Crores annually to its customers.



Q:1)

Suppose Factoring services are not availed. In that case, the total cost is –

• Bad debt loss = 1% of 1000 lacs = 10 lacs

• Discount expense = 1000 lacs * 0.5 * 2% = 10 lacs

• Funds blocked as creditors = 500 lacs * 45 / 365 = 61.64 Lacs

• % Cost of funds = 2*18/3 + 1*15/3 =17 %

• Cost of blocked funds = 61.64*17% = 10.48 Lacs

• Thus total cost = 10 + 10 + 10.48 = 30.48 Lacs

If the factoring services are availed, the total cost is –

• Commission expense = 3% of 1000 lacs = 30 lacs

• Funds blocked as creditors = 1000 lacs * 24 / 365 * 17% = 11.18 lacs

• Discount charges = (61.64 – 11.18)*0.20*0.85 = 8.58 lacs

• Thus total cost = 30 + 11.18 + 8.58 = 49.76 lacs

So, factoring services should not be availed.



 

End of Down-turn / Amdavad

Dear Friends,

Day before yesterday; at around 1.30 AM ( Dussera ) I went for a big round ( aanto ) of Amdavad. The idea was to get a feel of city's festive spirit. From what I saw and based on other
recent observations, I can claim the following -

" Amdavad ( and by extension - India ) is definitely out of the down-turn ".

People are back to their free spending ways. The verve and spirit displayed on streets of Amdavad at 1.30 in night can not be reconciled with any sort of down-turn. People have enjoyed the navratri with a " recession be damned " attitude. In addition to such anecdotal evidences, there are more definite signs -

• A large number of new real estate projects - residential and commercial, have been
  announced in the last month or so. There are at least 5 new big projects which are currently being marketed. Flats costing Rs. 1.5 crores+ ( Riviera Elegance, Safal - Param etc. ) are being lapped up by Amdavadis without any great fuss.
• New luxury hotels - Marriot, Crowne Plaza and a third one on Ashram Road have come up / are coming up at frequency of 3-4 months !!!
• One may argue endlessly as to whether there is a " genuine demand " for so much real estate or it is merely a bubble. But, from an economic point of view no one can dispute that buildings are being made - steel, cement and glass are being consumed and employment is being created.
• New car dealerships are coming up. Audi and Volkswagen have started new dealerships in Ahmedabad. Cama motors has started a new business - exclusively for selling high-end sedans and SUVs in Ahmedabad.
• Credit is flowing. The big baapji - SBI is flooding consumers with cheap home-loans ( 8%) and car-loans ( again 8% !!! ). Sure, private banks like ICICI Bank are still recovering but due to supposedly stupid policy of bank nationalization pursued in 1970's , the private banks don't count for much in India !!!
• In spite of a poor monsoon, people don't seem to be remotely bothered or concerned. I expect a mega spending spree during this Diwali. Watch out for sales of auto and consumer durables during this festive season.
  
  All this translates into a very robust GDP growth in India. I expect that we will grow at 7-8% in 2009-10 and 8-9% in 2010-11. Also, there is likely to be a HUGE RALLY in Indian Stock markets ( all emerging markets ) over next 2-3 years. In response to recession, all countries have printed trillions of dollars of new money !!! As market participants get more comfortable, this enormous amount of money will start chasing growth and will jack up asset prices in emerging markets like India. The next rally may make the earlier rallies look very silly !!!