Case Study

Read the case carefully and answer the following questions:

1. Prepare the incremental projected income statement from the expansion project for the first
five years.
2. Determine the incremental cash flows of the project from the long term funds point of view
assuming project life of five years.
3. Appraise the project in terms of the following:
a. Benefit-cost ratio
b. Internal rate of return
c. Discounted pay-back period.
4. Discuss the risk factors inherent in such projects.
5. Companys management is using PERT chart for execution of the project. There is another
very popular and simpler technique Gantt Chart. Discuss the use of Gantt Chart as a tool of
control.
SUNRISE PROJECTS LTD.
HISTORY
Sunrise Projects is an existing profit making Company engaged in Construction Activities. The
Company was originally incorporated on March 15, 2000 as Continental Constructions Private
Limited and in the year 2000, it took over the running construction business of M/s Sunrise
Constructions, a partnership concern and executed projects on turnkey basis in different parts of
the Country. From traditional business of building construction, the Company diversified into
Coal Handling Plants, building of rail embankments, bridges, tunnels etc.
PRESENT BUSINESS
The Company is in the business of Construction activities. It undertakes and is specialized in
Construction Engineering and Turnkey Projects viz.,
Deep Excavation
Heavy Rock Cuttings
High Railway Embankments
Major Canals & Earthen Dams
Dykes
Coal Handling Plants
Heavy Workshops
Industrial Structures
Development of townships
Roads and concrete pavements
Water supply and sewage disposal works
Ventilation and Pressurization
Fabrication and equipment erection works.
All the clients are Central or the State Governments, Public Sector Undertakings and other
Government Companies.
The Company has obtained the following registrations:
a. Registered Contractor in Unlimited Class Category with Government of India Undertakings.
b. Registered Contractor in Unlimited Class Category with State Government of Andhra Pradesh,
Karnataka and Madhya Pradesh.
c. Registered Contractor in Special Class for the following undertakings.
Konkan Railway Corporation Ltd.
Narmada Valley Development Authority
Ltd.
Coal India Ltd.
Jalagon Municipal Corporation Ltd.
South Eastern Coal fields Ltd.
South Central Railways
Northern Coal Fields Ltd.
National Airport Authority of India
M P Water Resource Department
National Thermal Power Corporation
Indian Road Construction Corporation Ltd.
Sardar Sarovar Narmada Nigam Ltd.
Engineers India Ltd.

PROJECT
The Company has been undertaking projects across the country. Due to excellent opportunities
available for expansion of business, the Country proposes to augment its fixed assets viz., plant
and machinery and other equipments to enable it execute large and turnkey projects; to increase
the networth of the Company to enable it to qualify for higher bids and to compete with other
large Companies and to augment its long term working capital requirements including margin
money on Bank Guarantee.
Pre-Tendering
The Think Tank of the Company continuously scans the various new papers, magazines,
journals and periodicals and shortlists the prospective projects for tendering and prequalification.
The `Top management of the Company from Projects, Finance and Engineering Divisions then
evaluate each project and finalises the projects in which the Company should participate. Sealed
tenders are prepared and submitted to the Clients. The tenders are opened at Clients places in the
presence of bidders and quotations of all the participants are read out.. The one with the lowest
quotation and meeting all the prequalification criteria is awarded the Contract.
Post-Tendering
After receipt of the award, the Management designates an Executive Team to draw the detailed
plan along with PERT Charts for execution of the project. Targets are fixed, responsibilities are
identified and authorities are defined for each project.
Execution
As per the plans, The Project Manager designated will coordinate the mobilization of Machines,
Materials and Manpower to the site. A weekly fortnightly/monthly review will be conducted at
different levels to continuously monitor the project implementation with the ultimate object of
delivering the project as per the time schedule and as per the required quality parameters.
Raw Materials
The raw materials required for Civil Engineering works are bricks, sand, steel bars, wood, pipes,
steel shuttering, Gravel etc. All these materials are easily available and the Company does not
foresee any problem in procuring the same as they are available at any point of time.
Utilities
Power
Power is required at the project site to run machines. Wherever possible power is sourced from
the nearest substations and in the absence of the same, diesel generators are used. The diesel
generator sets are moved to the project sites wherever required. Most of the equipments are diesel
operated.
Fuel
Diesel is required for operating heavy machinery and construction equipments at the sites. At all
major project sites, own-diesel bunks are arranged with licenses and purchases are directly made
from the Oil Companies.
Water
Water is sourced from the canals, river or borwells. In case of irrigation works, water will be
sourced from the canals. For other works the water will be sourced from nearby wells/reservoirs
by water tankers or by digging tubewells.
Pollution Control
The Companys operations do not generate any effluents. No permission is required from
pollution control board for the operations of the Company.
Quality Control
A full fledged laboratory with testing apparatus for testing different materials,
components/ingredients of concrete is maintained by the Company at the Site of the Project. The
concrete is tested for its strength, water resistance, tensile strength. Similarly tests are done for
soils like density test, OMC test, consolidation test, elementary grading test etc. The tests for
bitumen/tar include penetration tests. Experienced team of technical staff look after the testing

process to ensure proper quality. All the materials used in the work are tested in accordance with
stipulated standards and any material that does not conform to these standards are not used. A
qualified and experienced Engineer is entrusted with controlling of the tests/activities of the lab.
Manpower
The success of any Construction Company depends on the quality of man-power it possesses. The
Company has a team of well-qualified and experienced professionals on its rolls. The present
strength of the Company is as follows:
1. Engineers 60
2. Diploma holders 35
3. Graduates 60
4. Skilled Employees 400
5. Unskilled Employees 950
Personnel for various contracts will be posted out of available strength depending on the
requirements of the site.
Schedule of Implementation
Orders for the plant and machinery and equipments have already been placed. Deliveries are
expected to be completed by end April 2001. Schedule of implementation of projects undertaken
by the Company will be as per the clients requirements in each case.
FUTURE WORKS
In its recent survey, National Highway Authority of India alongwith Asian Development Bank,
shortlisted 42 Companies for construction of Highway. Sunrise Projects Limited qualified for the
same alongwith Binapuri Holdings BHD, Malaysia. The Company is bidding for several projects
and confident of bagging some of them. Projects being bid by the Company include:
a. Construction of Highway Roads
b. Guage Conversion Works
c. Krishna Water Projects
d. Coal Handling and Treatment.
The Union Government has decided to go in a big way to private the development, maintenance
and operation of the national highway/express-ways with a view to strengthen the road network
all over the country. According to conservative estimates, a colossal investment of nearly
Rs.60,000 crores is expected in construction of national highways by the private sector in due
course. By the year, 2015, a length of nearly 10,000 kms of Expressways will be required to be
constructed in a phased manner. Besides, there are also proposals to upgrade the existing level
crossing on the national highways to be converted into over-bridges. The Company proposes to
participate in the tenders to be floated by the Government for the construction of above projects
and also various others Government Undertakings under the following schemes.
a. Build-Operate-Lease-Transfer (BOLT)
b. Build-Own-Operate (BOO)
c. Build-Own-Operate-Transfer (BOOT)
d. Build-Operate-Transfer (BOT)
The Company is exploring the possibilities of executing coal washeries, Express Highways, Rail
over bridges, Rail under Bridges, Airports and Power Plants under Build-Own-Lease-Transfer
Concepts for Coal India Limited, State and Central Government, National Airports Authority of
India and State Electricity Boards. With the growing emphasis on infra-structural development
and maintenance, the prospects for the Construction industry in the country are bright.
COST OF THE PROJECT
The cost of the project has been appraised by Canara Bank, Industrial Division, Bangalore vide
their report dated November 01, 2000. The purpose and scope of appraisal was to ascertain the
technical feasibility and financial viability of the project sanction of term loan and for the purpose
of raising funds from the Capital Market.

COST OF THE PROJECT (Rs. in lakhs)

Plant & Machinery
287.00
Equipments
146.00
Miscellaneous Fixed Assets
11.00
Vehicles
10.00
Contingencies
22.00
Pre-operative Expenses
10.00
Issue Expenses
60.00
Long term working capital
444.00*
Total
990.00
* Includes margin on Bank Guarantee of
Rs.277 lakhs

MEANS OF FINANCE (Rs. in lakhs)

Equity Capital
Promoters
40.00
Public
236.00
Share Premium
Promoters
60.00
Public
354.00
Term Loan
300.00*
Total
990.00

Canara Bank has sanctioned a term loan of Rs.300 lakhs on the following terms and conditions:
1. Primary : First Charge on the entire fixed assets of the Company. Personal guarantee of all the
directors.
2. Interest at the rate of 15% P.A.
3. Repayment in 4 equal annual instalments of Rs.75 lakh each. Instalments begin from the end of
second year. For financing the expansion project, the company has issued 27.6 lakhs shares of
face value Rs.10 at a premium of Rs.15 per share. The issue was fully subscribed.
The company has projected without the expansion project the following Gross revenue figures
for years 2002 to 2006.
(Rs. in lakhs)
Year
2002 2003
2004 2005 2006
Gross revenue
3500 3800 4000 4200 4500
It is expected that due to the expansion project the work receipts will be increased by 25% over
the above projected revenue figure for all five years. Due to increased investment in plant and
machinery, and equipments the company will have other income from giving those items on hire,
estimated at 1% of the incremental revenue.
Additional Information
1. Assume project life of five years for appraising the project.
2. Salvage value of fixed assets can be taken as 5% of Gross Block at the end of five years.
3. Material consumption can be assumed at 50% of the gross revenue based on the past actuals.
4. Labour charges can be assumed at 10% of the gross revenue based on the past actuals.
5. Repairs and Maintenance can be assumed at 20% of Gross Block.
6. Depreciation to be calculated as follows:
Companies Act (SLM)
IT Purposes (WDV)
Plant and machinery
10%
25%
Equipments
15%
25%
Miscellaneous fixed assets 20%
15%
Vehicles
25%
40%
7. The company expects to declare a dividend of 20%. And the dividend is expected to grow by
5% each year.
8. The tax rate applicable for the company is 35%.