Maruti Car’s Dealership
Vijayawada literally translates to “The Place of Victory” and is the third largest city in Andhra Pradesh. It is located on
the banks of the Krishna River and is part of the fertile Krishna delta. There are a number of canals that got through
vijayyawada and irrigate the farm land throughout the delta. Vijayawada is famous for being both the largest railway
junction in South India and the most important station of the South Central Railways. National highways 5 and 9 pass
through the city.
Sajja Srinivasa Rao, a software consultant turned entrepreneur in thc U.S.A., was in India for summer vacation.
He,along with his wife Vijaya, had saved enough for tough days and were now contemplating investing in a new
venture to ensure that their savings gave enough returns. Sajja was emotionally attached to Vijayawada and wantcd
to invest in the place, provided the returns were at least 2O% in any project. He saw an advertisement by the Maruti
Cars offering a second dealership in the city. Maruti already had a dealer in the city, Varun Motors. In FY-2006,
Varun Motors sales are expected to be 2,000 cars per year.
Seeing an opportunity. Vijaya called up her childhood friend. Kishore. A chartered accountant, Kishore, was working as a
financial consultant. He decided to take the project with a five-year time period. Kishore made a few enquiries from local
experts and made a few logical assumptions as follows:
(a) Real estate investment in a prime location was expected to cost Rs 50 Lakhs. Showroom construction and
furnishing was expected to cost another Rs 25 Lakhs. Working capital investment was Rs 23 Lakhs.
(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 sale price of Maruti cars was assumed to be Rs 4 Lakhs in 2006. This figure was expected to
increase by 10% every year.
(e) Terminal value of the project was estimated to be at least five times the cash flows for the last year.
(f) For dealers having less than Rs 1 crore sales, Maruti had a dealership margin of 2.5%. For all other dealers
Maruti gave a dealership margin of 3%.
(g) Sales and administration expenses were estimated at Rs 2 Lakhs for the first year. For future years. they were
expected to grow by Rs I 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.
(j) Kishore decided to make things simple and hence he used a straight line depreciation with a five-year period
for all capex.
(j) Corporate Income Tax rates were taken as 37%..
You are required to analyze the project and estimate the cash flows from FY 2006 onwards. Calculate the pay-
back period, profitability index, net present value, internal rate of return and modified internal rate of return for the
new car dealership project. Should Sajja take the dealership and go ahead?
Vijayawada literally translates to “The Place of Victory” and is the third largest city in Andhra Pradesh. It is located on
the banks of the Krishna River and is part of the fertile Krishna delta. There are a number of canals that got through
vijayyawada and irrigate the farm land throughout the delta. Vijayawada is famous for being both the largest railway
junction in South India and the most important station of the South Central Railways. National highways 5 and 9 pass
through the city.
Sajja Srinivasa Rao, a software consultant turned entrepreneur in thc U.S.A., was in India for summer vacation.
He,along with his wife Vijaya, had saved enough for tough days and were now contemplating investing in a new
venture to ensure that their savings gave enough returns. Sajja was emotionally attached to Vijayawada and wantcd
to invest in the place, provided the returns were at least 2O% in any project. He saw an advertisement by the Maruti
Cars offering a second dealership in the city. Maruti already had a dealer in the city, Varun Motors. In FY-2006,
Varun Motors sales are expected to be 2,000 cars per year.
Seeing an opportunity. Vijaya called up her childhood friend. Kishore. A chartered accountant, Kishore, was working as a
financial consultant. He decided to take the project with a five-year time period. Kishore made a few enquiries from local
experts and made a few logical assumptions as follows:
(a) Real estate investment in a prime location was expected to cost Rs 50 Lakhs. Showroom construction and
furnishing was expected to cost another Rs 25 Lakhs. Working capital investment was Rs 23 Lakhs.
(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 sale price of Maruti cars was assumed to be Rs 4 Lakhs in 2006. This figure was expected to
increase by 10% every year.
(e) Terminal value of the project was estimated to be at least five times the cash flows for the last year.
(f) For dealers having less than Rs 1 crore sales, Maruti had a dealership margin of 2.5%. For all other dealers
Maruti gave a dealership margin of 3%.
(g) Sales and administration expenses were estimated at Rs 2 Lakhs for the first year. For future years. they were
expected to grow by Rs I 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.
(j) Kishore decided to make things simple and hence he used a straight line depreciation with a five-year period
for all capex.
(j) Corporate Income Tax rates were taken as 37%..
You are required to analyze the project and estimate the cash flows from FY 2006 onwards. Calculate the pay-
back period, profitability index, net present value, internal rate of return and modified internal rate of return for the
new car dealership project. Should Sajja take the dealership and go ahead?