Vijayawada literally translates to “The place of Victory” and is located on the banks of Krishna River in

Andhra Pradesh. Vijayawada is famous for being both the largest railway station in South India and the
most important station of the South Central Railways. National Highways 5 and 9 pass through the city.

Srinivas Rao, a software consultant turned entrepreneur in U.S.A., was back to India on summer
vacation. He along with his wife Swathi had saved enough for tough days and they were now
contemplating investing in a new venture to ensure that their savings give enough returns. Srinivas rao
is emotionally attached to Vijayawada and wanted to invest in that place, provided they had returns of
at least 20% in any project. He saw an advertisement by Maruti Cars offering a second dealership in the
city. Maruti had already had a dealer in the city named Varun Motors. In Fy 2020, sales were expected
to be 2000 cars per year.

Seeing an opportunity, the couple called up their friend Kiran who is a chartered accountant by
qualification. He is currently a popular auditor and also takes up financial consulting projects. Kiran
decided to take up the project with a five year time period. He made few enquiries from the local
experts and made a few logical assumptions as follows:

a) Real estate investment in a prime location is expected to cost Rs.50 lakhs. Show room
construction and furnishing was expected to cost another Rs.25 lakh. Working capital
investment was Rs.23 lakh
b) A 15% growth can be expected in the sales of the cars over the next five years
c) Of the total sales of Maruti cars, market share of the new dealership for the first five years was
assumed as 5%, 9%,14%, 19% and 22% respectively
d) The average selling price of Maruti cars was assumed to Rs.5 lakh in FY 2020. The figure was
expected to increase by 10% every year.
e) Terminal value of the project will be five times of the cash flows for the last year
f) For dealers having less than Rs.1 crore of sales, Maruti had a dealership margin of 2.5%for all
other dealers, Maruti used to give a dealership margin of 3%
g) Sales and administrative expenses are estimated at Rs.2 lakhs for the first year. For future years,
they were expected to grow by Rs.1 lakh every year.
h) Marketing expenses were decided as 1% of the total estimated sales for the first two years and
then 0.5% of the total estimated sales thereon.
i) Kiran decided to make things simple and hence he used a straight line depreciation with a five
year period on construction and furnishing. The salvage value at the end of five years is zero
j) Corporate income tax rates were taken as 37%
You are required to analyze the project and estimate the cash flows. Calculate the payback,
profitability index, NPV and IRR for the project. Should Srinivas Rao take the dealership and go
ahead?