Assignment no 1: Introduction: Harkirat, an architect, owns and operates the interior design company "Bright and Bold Interiors" in New Delhi. With only nine years of experience in the interior design sector, he has established himself as a leading figure in the field and is particularly well-known for his minimalistic approach to design. As a matter of fact, his spouse works in the same field as him, and they are partners in the company. During the year 2010, both of them were enrolled in a post-graduation study in design offered by the Florence Design School. Their company has received numerous awards both nationally and internationally. Harkirat has been driving a Maruti Swift for the past ten years for personal transportation, and he is considering switching to a different vehicle. Despite the fact that he prefers a mid-range sedan, he is considering a recently announced cross-over from BMW because of his wife's preferences. They had, in essence, made up their minds to purchase this particular model, and they had begun making financial plans to support their decision. Including extraneous expenses such as insurance and registration, the dealer stated the vehicle's ex-showroom price of Rs 39,90,000 including taxes and fees. He has been advised that the incidental expenses will total around Rs 6,00,000, which he has accepted. Harikirat has been putting money aside for the past five years in order to purchase a new vehicle. The total amount of money in this account has accumulated to approximately Rs. 18,00,000. He expects to get significant cash proceeds from the completion of ongoing projects in the next nine months, according to his estimates. He has two options: either wait until the end of the time and purchase the vehicle in full or take out a bank loan to cover the remaining debt. Financing Choices: Personally, Harkirat is not a fan of going on debt for the sake of consumption; yet he considered purchasing the vehicle now with a loan and paying it back at the end of the year. Because the money was only going to be borrowed for a limited period of time, he convinced himself that it was not a bad idea to take the loan. He dialled the local branch of HDFC bank, where he has a savings account, and inquired about the availability of a vehicleloan through the bank. The bank stated that the typical loan term for an automobile is 3E- months, and that the equal monthly payment (EMll is around Rs 3,1338 per Iakh of the principal amount, with additional information regarding the loan included in the Appendix. The BMW vehicle salesman recognised that Harkirat was seeking for a loan, and that he was informed that BMW also offers a number of nancing alternatives, as well as the following informationl: 1. BMW Standard Plan Under this plan, the customer can repay the loan and interest by making equal monthly instalments over the course of the loan [regular EMls}. A typical Standard Plan scheme details are given in Table 1 below. 2. BMW Bullet Plan This is a customised loan plan designed for customers who anticipate an increase in their ability to pay at certain stages during the loan tenure. As a result, the loan is structured in such a way that the monthly instalments are slightly smaller and the consumer is required to make some lump sum payments at specific times in time. 3. BMW Balloon Plan This is also a tailored loan with the option to pay reduced EMls and a larger lumpsum amount at maturity. The EMls are lower and the lumpsum amount is higher. Customers who intend to sell their vehicle at the end of the loan term will benefit the most from this arrangement. Table 1 Rsg Rs 35:91.0D0 23 monthly payments Rs 1,54,8TB Term ofthe loan All the plans have a minimum tenure of 12 months with a down payment of Rs 1,99,5(10. Harkirat was further informed that, there is a provision for prepayment of 25% of the outstanding principal amount in 1 or maximum 3 tranches in a year. If the prepayment is made within the first 12 months the prepayment charges amount to 5% on the amount of prepaid. While the prepayment is made after completing 12 months the prepayment charges amount to 3%. The dealer also mentioned that they had recently launched Leasing of new cars for self employed professionals like doctors, engineers, chartered accountants. In this option customer can drive a new yehicle without having to pay a large sum of money either in the form of down payment or loan. But the customers have to pay monthly payments termed as lease rentals and return the car once the lease period expires. This plan is called as BMW 350\" Planz. For the vehicle being considered by Ha rkirat, the dealer also proyided a typical lease plan the details of which were given in Table 2 below. Table 2 Down Payment Rs 997,500 Finance amount Rs 2,992,500 23 monthly payments Rs 39,075 Term of the loan 24 months Assured buyback amount Rs 2,673,300 Annual mileage 15000 kms The dilemma: Harkirat thought the most difficult part of his automobile buying decision was selecting on the model, but thanks to his wife, he was able to make this decision quickly. However, he believed that the financing aspect of purchasing the car was a straightforward decision, but that with so many options, selecting an acceptable financing plan is proving to be difficult. For the previous ten years, Harkirat has worked in the industry but knows very little about the commercial and financial sides, which is why his firm's accountant manages these aspects of the business. He phoned his nephew, who had just returned from Montreal after finishing his business studies, to help him with the funding decision. His nephew asked for the following information: preferred mortgage tenure, available funds for the down payment, and the projected timing and quantity of his future cash receipts. He also inquired about the rate of return on his savings with Harkirat. Harkirat provided the information in Table 3. Table 3 Down Payment amount available Rs 18,00,000 Preferred term of the loan 24 months Expected amount of cash receipt Rs 20,00,000 Expecting the money in 9 months from now Rate of return on fixed deposits 5.25% Existing loans nilAssignment Questions: 1. What is the implicit interest rate in HDFC Bank's offer? 2. Should Harkirat opt for the HDFC Bank deal or the BMW Standard Plan? 3. What is the implied rate for the BMW 360? What do you make of it? 4. Is it right to go for pre-payment of the loan? If he chooses to pre-pay the loan outstanding at the end of nine months what will be the amounts including pre- payment charges in case of (i) HDFC Bank (ii) BMW Standard Plan? Use the information in Table 2 for the computations. 5. Which plan is better, the BMW 360 or the BMW Standard Plan? Make appropriate assumptions. 6. Using your own words write the key learnings from this case, individually in not more than ten lines