fis ONT. . a CASE STUDY Bharat Engineering Works Bharat Engineering Works (BEW) is promoted by Mr Bharat Singh, a the machinery supplier had agreed for the deferred terms of payment qualified and experienced mechanical engineer. He worked for an as follows: aforcole rrajor, General Auto Lid (GAL). Over years of experience, Down payment : Rs 10 lakh he had developed a sheet metal component that was being procured After one year : Rs 20 lakh plus interest @ 15% on remaining by GAL through another vendor. GAL was not satisfied with the amount quality of the sheet metal components. In view of the better product After two years : Rs 10 lakh plus interest @ 15% on the developed by Mr Bharat Singh, his employer encouraged him to set remaining amount up his own unit and assured him all help. He decided to venture on Accordingly, the following requirement of fund was presented to the bank to which the bank agreed: Bharat Singh prepared the project report. The project cost was Rs 60 lal-consisting of Rs 40 lakh towards plant and machinery Rs (lakh) Year 0 Year 1 Year 2 Total and remaining Ps 20 lakh as working capital. Mr Bharat Singh with Funds required 30.00 20.00 10.00 60.00 all his resources could accumulate only Rs 20 lakh on his own and Equity 20.00 20.00 needed balance Rs 40 lakh as loan from a bank Loan 10.00 15.00 15.00 40.00 He approached his banker friend for a loan of Rs 40 lakh. After ove appreisal of the project and considering the assured orders from The bank sanctioned the loan on the following terms: GAL, the bank agreed to provide him Rs 40 lakh. However, the bank 1. The rate of interest would be 12% per annum. was willing to disburse the fund on a need-based basis according to 2. The aggregate period of the loan would be 7 years from now. fre requirement of funds as they arise. The bankers asked Bharat 3. The loan would have moratorium of two years from date of Singh to prepare the requirements of funds according to the time sanction. when the funds were actually required. 4. The repayment could be done in any of the following methods: Bharat Singh had negotiated the contracts for machinery on (a) In equal amount every quarter for 20 quarters along with deferred payment basis. On the recommendations of his employer, interest beginning Year 3 onwards on declining basis. (b) In equated quarterly instalments (EQIs) for 20 quarters commencing from Year 3 onwards. Moratorium ci two years was given because BEW did not have enough generation in the first two years. However, BEW would pay the interest during the period. Discuss IF BEW chooses the option of EQI as in 4(b), answer the following: 1. Work out the EQls for next 20 quarters for repayment of loan and interest 2. BEW is required to show interest portion of EQls in its profit and loss account each year. Find out the amount of interest in each EQI and the sum that would be shown as interest each year