1. Ayush Group of Industries
Read the case carefully and answer the following questions:
(a) Estimate the cost of the project and highlight the financing structure.
(b) Prepare the projected cash flows relating to long-term funds of the RBL for five years. Assume the
terminal value of fixed assets, excepting land, to be 90% of the book value at the end of 5th year.
(c) As a project analyst, comment on the important aspects of the project.
Ayush Group of industries is planning to set up a manufacturing unit of ball bearings in Jiljil, Gujarat.
The capacity of the factory would be 5,000,000 units per annum. Mr. Ayush director of Ayush Group
has been entrusted the responsibility of bringing that factory into operation. The primary business area
of Ayush Group is construction. The construction company was incorporated as Ayush Housing and
Construction Ltd. (a public limited company) on October 1983. Real estate development continues to
be the main business of AHCL, with focus on high and medium range residential and commercial
property. It concentrates on the area in and around Delhi, Bangalore and Mumbai. The construction
business was always with a special focus on Noida, Ghaziabad, Thane etc.
In October 2002 the company has launched new project called Ganga Enclave (Dehradun) in Joint
Venture with Dehradun Development Authority. The residential project at Faridabad involving
construction of about 2 million Sq.Ft of area is likely to be launched in early of 2004. The expected
turnover is approximately Rs.45 crores in this project for the first six months. In 1996, the company
has been awarded three prestigious projects. The Razala Bridge in Karnataka at a contract value of Rs.
300 million, the Rock Fill Dam in Doyang, Nagaland at cost of Rs. 1469 million and site levelling work
at Mangalore, Karnataka awarded by Kudremukh Iron and Steel Company at a cost of Rs.120 million.
These projects were completed as per the scheduled time.
Apart from these the company executed many industrial civil construction projects for the textile,
pharmaceutical, heavy engineering, chemical industries, commercial complexes, multi-storied
buildings, effluent treatment systems, etc, which involve civil and structural work, sanitary and
plumbing work, etc. The company made its entry into the overseas construction market in 1985 by
constructing a fibre-board factory at Abu Suhair. It was one of the most prestigious civil construction
contracts awarded by the Iraqi government to an Indian company. AHCL was again the first Indian
company to have secured a turnkey project of Hockil Dam Construction in Sudan in 1987. The
company has been awarded a service contract for the construction of sewerage system of Abu Aisha in
Libya equivalent to Rs.1000 millions and for construction of Civil Works of Sugar Shafts & Power
House Complex in Haryana, amount equivalent to Rs.1984 million and the work has already been
commenced. It has received various awards from the Engineering Export Promotion Council. Currently,
it is one among the very few Indian companies to have secured sizeable construction contracts
overseas. The new company is promoted by Ayush Group in a joint venture with Eastern Asian Bearings
Ltd. It entered into a technical collaboration with VEB Kombinat Waelzlager Und Normteile (an
amalgamation of bearing companies in Germany which markets bearings under the brand name DKF).

2. Under the agreement, the collaborators were to supply all technical know-how and provide designs,
drawings, etc to manufacture ball bearings.
The company is expecting that the products find applications in motors, handpumps, idlers, machinery
and the automobile industry. The company's major customers would be HMT, Kirloskar Bros, Enfield,
Mahindra & Mahindra Tractors, Escorts, NLC, Bhilai Steel Plant, Crompton Greaves, Nalco, GAIL, Ashok
Leyland, Voltas, Tata Motors (Previously TELCO), TISCO, Hindustan Sheet Metals, etc. The new
company, Ayush Bearings Limited (ABL), was formed on May 14, 2003 as a joint venture company. The
Chairman cum Managing Director of the company is Mr. Ayush. The nominee from the Eastern Asia
Bearings is Mr. Ram Jajodia. Two more nominees are supposed to join from the Eastern Asia Bearings.
The project site has been finalized at Rahakana, Chhattishgarh. The site is 36 kilometers from
Bilaspur. Three more manufacturing units are coming up in that locality – These are production unit of
electric brakes from Kapoor group, Bulk Drug manufacturing company from Shameera
Pharmaceuticals and the largest potassium based Fertilizer factory of German outfit Duntensdamer.
The basic cost of the land is Rs. 24 lakhs. The cost of registration is 12.5%. The leveling and
development work in the site is already over. It has cost the company around Rs. 15 lakhs. More or
less 500 meters of approach road is constructed by the company at a cost of Rs. 5 lakhs. Internal
roads of the factory are not yet done. It is expected that by the end of October 2003 this work could be
completed with a cost of Rs. 8 lakhs. The boundary wall of 8 feet height is already constructed at a
cost of Rs. 50 thousands. The cost of buildings and civil works cover the following:
Building for main plant at a cost of Rs. 55 lakhs
Building for water treatment plant at a cost of Rs. 20 lakhs
Building for Hydraulic System at a cost of Rs. 5 lakhs
Building for Pneumatic System at a cost of Rs. 3 lakhs
Building for godowns at a cost of Rs. 8 lakhs.
Building for administrative office at a cost of Rs. 5 lakhs
Building for Time office at a cost of Rs. 1 lakh.
Building for canteen at a cost of Rs. 2 lakhs.
Garages at a cost of Rs. 1 lakh
The basic process equipments are being planned to be procured from Germany. The CNC machine
would be supplied by a Swedish company. The total FOB value of these equipments is expected to be
in the range of Rs.12 crores. The support equipments like water supplying system, material handling
system, process automation, plant illumination, compressed air system, plant electrics and hydraulic
system etc. are being supplied mostly by Indian vendors. Water supply system is supplied by Mather &
Platt India Ltd. The cost of total supply would be Rs.3.5 lakhs. The total system covers the supply of
four pump-motor sets along with separated control system. The material handling system proposed
would comprise of two EOT cranes and three mobile electric cars. Apart from these a couple of
wheelbarrows are also planned. EOT cranes are supplied from HEC, Ranchi at a cost of Rs.30 lakhs.

3. Electric cars are imported from Mitsubishi, Japan for an FOB cost of Rs.24 lakhs. Larsen and Toubro
have been roped in for the supply of process automation. The whole process is divided into four zones
and the controls of each of these zones are isolated. The supervisor level of control is done by a higher
level computer monitoring the interfaces of these zonal control systems. The cost of the whole system
would be Rs.25 lakhs. Plant lighting system is being procured from Philips India. The whole supply
includes: Bay lighting with 500/1000 watt HPSV lamps, Room lighting with 2x40 watt tube lights, stair
lights with 100 watt sodium lamps in flowering brackets etc. The whole package would cost the
company Rs.5 lakhs. The compressed air system would be supplied by Crompton Greaves India. The
system consists of two compressors with a common drying unit and a comprehensive cooling water
supply system. The supply also includes its own control unit in electrical panels. All of these put
together would charge the company around Rs.7 lakhs. The company is planning to get the plant
electrics requirements from Siemens India. The motor control centers and power control centers are
the primary elements in this package. The company has to commit an outlay of Rs.3 lakhs for this
system. The hydraulic system would cost the company around Rs.6 lakhs. The cost of pipe lines for
water supply, compressed air supply and hydraulic lines would be Rs.2 lakhs. The exhaustive electrical
system would demand a large usage of cables of different types. The company is planning to get the
cables from Hindustan Cables at a cost of Rs.3 lakhs.
The customs duty applicable on imported capital equipment is 35% of basic cost. The average rate of
excise for indigenous machines is 16%. The average cost of octroi, freight, transportation, loading,
unloading and forwarding charges is 4%. The erection charges on an average come to 10% of the basic
cost of the plant and machinery. Under miscellaneous fixed assets the office equipments, furniture
and vehicles worth Rs.50 lakhs have to be purchased.
Legal charges for drafting agreements for memorandum and articles of association would cost the
company Rs.50,000. The cost of market survey was Rs.200,000. Reily and Associates had prepared
the feasibility report of the project. Total expenditure for the preparation of feasibility report was
Rs.80,000. Other expenses expected to be incurred by the company till the date of commencement of
commercial production are as follows:
Travelling expenses to the of Rs.125,000
Postage, Telegrams and Telephone expenses to the tune of Rs.50,000
Printing and Stationery expenses to the tune of Rs.70,000
Advertisement expenses to the tune of Rs.10,00,000
Insurance premium during construction to the tune of Rs.3,00,000
The cost of electricity is Rs.5.90 per KWH. The slabs for power requirement are as follows:
Capacity Utilization Upto 60% 60% to 85% 85% to 95% Above 95%
Daily Power 1500 1323 1100 1000
Requirement (KWH)
The cost of consumables per unit of final product is Rs.4.

4. Project Execution Schedule
Activity Start Finish
Land Development July15, 2003 August 10, 2003
Civil Work August 1, 2003 September 10, 2003
Equipment Erection August 5, 2003 December 15, 2003
Equipment Testing December 2, 2003 December 30, 2003
Integrated Trial January 20, 2004 February 20, 2004
Trial Production March 1, 2004 March 20, 2004
Commercial Production April 1, 2004
Additional Information
1. The capacity utilization is expected to be 80%, 90% and 100% in the first, second and third year
respectively. Thereafter the capacity utilization of 100% is expected to be maintained.
2. In order to provide for escalation in cost, contingencies are to be provided at 10% on fixed assets
yet to be created, excluding land.
3. IDBI Bank has agreed to extend a term loan of Rs.10 crore to ABL. The implicit rate of interest is
14% per annum. The principal amount of the loan is to be repaid in 5 years beginning from the
end of first year in equal annual instalments.
4. The promoter’s contribution is Rs.8 crores.
5. Project cost excess of promoter’s contribution and term loan is to be raised through public issue of
equity capital. Cost related to issue would be 5% of the size of the public issue.
6. The average expected sales price per unit of ball bearings is Rs.85.
7. The cost of repairs and maintenance in the first year of commercial production is 2% of the cost of
plant and machineries. An increase of 5% is to be provided every year.
8. The depreciation rates applicable are as follows:
Buildings Machineries and Other Assets
Company Law Purposes 3.34% 10.00%
Income Tax Purposes 10.00% 10.00%
9. Salaries and Wages are estimated to be Rs.11.25 lakhs per month in the first year of commercial
production. An annual increase of 5% is expected in the coming years.
10. Administrative overheads are estimated to be Rs.60 lakhs in the first year of commercial
production with an increase of 4% every year.
11. Selling overhead is calculated at the rate of 3% on the sales value.
12. The cost of raw material is 50% of the sales.
13. The following periodicities have been estimated for the computation of working capital:

5. (Period in months)
Particulars Periodicity
Raw Materials 1.1
Consumables 2.5
Finished Goods 0.5
Debtors 1.2
Expenses 1.0
14. Axis Bank has agreed to finance 75% of the working capital requirement from 2nd year onwards.
Rate of interest on the bank borrowings for working capital is 12%
15. Working capital requirement during first year should be included as margin money in the project
cost.
16. Average asset beta of the companies engaged in the manufacturing of ball bearings is 0.80.
17. 364-day treasury bills return 5.2% in the market.
18. Premium on the market portfolio is 6%.
19. Tax rate applicable to the company is 35%.
20. The company has decided to distribute 20% of the profit after tax as dividend.