Gupta bricks case study on capital budgeting

1. GUPTA BRICKS-Bull’s Trench Kiln
and Vertical Shaft Brick Kiln
Submitted to : Submitted by:
Dr. Meena Sharma Aashna Garg
Angad Singh
Mohit Goyal
Nikhila Kharb
Ravneet Kaur
Vishal Vivek

2. BRIEF TO THE CASE
• In this case Mr. Gupta who owns a Brick making
company called Gupta Bricks based in MP.
• The Business is operating under full capacity
• Capacity of Brick production is limited by Bull
trench kiln (BTK) the most commonly used
technology for firing the bricks.
• Mr Gupta owns 2 BTKs- average capacity of
30,000 bricks per day.
• Annual production of about 75 lakh bricks per
BTK when operating for 250 days.

3. • Construction industry is passing through a boom
where real estate prices were rising, tremendous
demand was there due to new construction
and rebuilding and the prices were increasing
from last 2 years.
• A new technology -VSBK ( Vertical shift brick
kiln) has come into the market recently and
promises to expedite the process and increase
production by about 10-15%.

4. VSBK-Vertical Shift Brick Kiln
• VSBK technology is environment friendly.
• It is better for the health and safety of the brick
kiln workers.
• This technology was tried and tested successfully
by several organizations.
• Expected to reduce fuel costs by about 20%.
• It gives flexibility of operation, good product
quality and substantial saving in energy costs.
• Products are superior to those produced by
BTKs and could fetch about 3% higher prices.

5. Advantage of using VSBK technology-
• Saved fuel cost.
• Bricks remain inside the kiln for 24-30 hours as
compared to 20-30 days in the BTK technology
• Thus, Working capital reduced substantially.

6. QUESTION To be ANSWERED
Whether or not Mr. Gupta should replace one of his
BTKs with three 2 –shafts VSBKs?

7. Existing situation
Production 15000000 Per ‘000
Raw material 5100000 0.34
Labor 3300000 0.22
Fuel 3300000 0.22
Overheads 1050000 0.07
Revenue 16500000 1.10
Cash profit (Revenue –
all expenses)
3750000 0.25
Depreciation 100000 0.01

8. Proposed investment
Production 16500000 Per ‘000
Raw material 5610000 0.34
Labor 3960000 0.24
Fuel 1155000 0.176
Overheads 2904000 0.07
Depreciation 350000
Depreciation = (1000000*3)= 3000000/10
=300000+50000 (50000 being depreciation of 1 BTK)
= Rs. 350000

9. 3 VSBK 1 BTK
Production /annum 9000000 7500000
Production/day 30000 30000
Revenue 10197000 8250000
Cash outflow 3000000 -

10. Incremental cash flows
Rs. (p.a.) Per unit
Maintenance cost 60,000
Raw material 5,10,000 0.34
Wages 3,60,000 0.24
Overheads 1,05,000 0.07
Fuel (2,64,000) 0.176
Depreciation 2,50,000
Total expenses 10,21,000
Revenue 1699500
Profit 678500
Tax 61065 0.09
Profit after tax 617435
Net cash flow (PAT +
Dep.)
867435
PVCI (Net cash flow
*5.216)
4524540

11. • Pay back period = Initial Investment/Cash
Inflow per Period
= 30,00,000/ 867,435
= 3.458 years
• NPV = Total PV- Initial Outlay
= 45,24,540-30,00,000
= Rs. 15,24,540.

12. As payback period is less than 5 years i.e.
3.458 as expected by Mr. Gupta and NPV , at
cost of capital 14% , is coming out to be
positive i.e. Rs. 15,24,540 , so it is advised
that Mr. Gupta should replace one of its BTK
with two shafts VSBK.
CONCLUSION