Based on fhe delimna below is taking out a loan a beneficial option foe Rudra? Why or Why not?
The March 2020 contract offered by Baroda Bank for the lease of 100 DG sets was the opportunity that Hairiya and Patra had been anticipating for some time. Their company could expand from operating strictly in the highly competitive business of providing DG maintenance services into the new, vertical business market of leasing DG sets. Both Hairiya and Patra were eager to explore this lucrative new opportunity, which they hoped would bring a much-needed longer-term revenue scope and help diversify their business. The proposal was required to be structured in the form of a lease, rather than a sale, and had to include all incidental and operational costs. The COVID-19 lockdown had made the entire Rudra staff unavailable. Therefore, the task of calculating the pricing in the bid proposal for the lease of all equipment and services rested on Hairiya and Patra. two company executives were able to meet in person to discuss and prepare their proposal. After liring about the well-being of each other's families, especially under the dire circumstances of the demic, the two co-workers started with a conversation about the business: Patra: How are our field workers doing? Were they able to attend to the emergency maintenance calls that we received? Hairiya: I have been in regular touch with our field workers and office staff; all are keeping good health. Some of our field workers were able to go and attend to the DG emergencies at our hospital clients. They are taking all precautions. Luckily, local administration has classified DG maintenance under essential services, so we can attend to emergencies despite the lockdown. Patra: That's good. We don't know how long this lockdown will last, but we need to support our clients to the best of our ability. Our finance manager has assured me that we have enough cash balances to pay salaries for a few months. He will come for a couple of hours at the end of April and transfer salaries. Hairiya: He could have done so from home, had we provided him with a laptop computer instead of our usual office desktop computers. That would have allowed him to help us now, in our bid preparation, also. Does it make sense to go ahead with the proposal in this uncertain environment? Will we be able to procure and service the generators required by the Baroda Bank? Patra: Banks are an essential business, and branches are opening for limited hours every day. All their support services have been deemed essential too. Once we are successful in the bid, the bank will help us procure and service the DGs. Hairiya: What about field workers? Will we be able to hire more [workers] to service this large proposal, while maintaining our service standards? Patra: In the near future, as many of our other elients have been forced to shut [down] their establishments due to the lockdown, we in fact have excess field workers on our [pay]rolls. If and when businesses start to reopen. we can look to hire more field staff ouickly Hairiya: Sounds fair. Let's discuss the technical details before the financial bid. What type of DGs is the bank looking for, and how much would it cost us? Patra: The bank wants 15 kVA generators set up at their 100 branches. A 15 kVA DG set would cost approximately $3,000 plus 18 per cent goods and services tax. The 100 DG sets would cost $354,000. I believe we can fund this internally using our cash reserves. Hairiya: We can think of taking a loan as well. Our bank would be ready to fund at most 80 per cent of the capital expense, at 10 per cent interest, payable in equal instalments on an annul basis. A 30 per cent corporate tax would provide us with a tax shield, and the actual interest paid by us in terms of cash flow might be even lower. We have to fund the rest through Rudra's cash reserves. What is the contract period? Patra: The lease is for six years, with the lease payment remaining the same for the first three years. We are allowed to increase the lease payment by 10 per cent in the fourth year, and [it] has to be kept [the] same thereafter. I hope our bankers will be comfortable providing us with a six-year loan. The generators can be used as collateral for the loan. Hairiya: Yes, definitely. The collateral will make the loan less risky for our bankers. Who will incur the running costs of diesel and maintenance, Rudra or Baroda Bank? Patra: We will have to inr all running costs. Because we are purchasing the generators, we can also depreciate them using the straight-line method to zero. Hairiya: That is good. We can do the maintenance in house and ensure that the generators remain in good condition. Banks work for approximately 250 days a year, as compared to telecom towers, which run all through the year, and this is to our advantage. If the contract is not renewed, we can sell the DGs at $1,500 apiece after six years
