In $2016,$ Saurabh Sharma, Senior Vice President at Bhatia Textiles, was preparing a capital budgeting proposal for launching a new line of branded shirts. The project, spanning $10$ years, involved an investment of INR $520$ million, covering machinery and working capital. Anticipated production was $240,000$ shirts yearly, initially priced at INR $1,300$ each, with a planned price increase to counter inflation. The investment aimed to capitalize on India's booming retail sector, expected to grow significantly by $2030.$ Funding would be split equally between equity and new debt, with the latter at a $12\%$ interest rate. The proposal included detailed financial analyses, considering various costs, depreciation, taxes, and inflation adjustments. Two demand scenarios, Optimistic and Expected, were to be analyzed to estimate the project's viability using NPV and IRR methods.

Insights:

The project aligns with India's retail growth, tapping into the rising demand for branded apparel.

Detailed financial planning reflects a thorough risk assessment and market strategy.

The balanced funding strategy mitigates financial risk, combining equity and debt.

The Essence $(80/20)$:

Core Topics:

Market Opportunity: Capitalizing on India's retail and apparel sector growth.

Financial Planning: Detailed analysis using NPV and IRR, considering inflation, costs, and revenue projections.

Investment Strategy: Combining equity and debt to fund the expansion, reflecting a balanced risk approach.

The Action Plan:

Finalize Financial Models: Complete NPV and IRR analyses under both demand scenarios.

Secure Funding: Arrange the equity and debt financing as planned.

Monitor Market Trends: Regularly review market conditions to adjust pricing and production in line with current trends.

Evaluate Progress: Regularly assess the project$$s performance against forecasts and make adjustments as necessary.

Blind Spot:

Potential underestimation of market risks, such as changes in consumer preferences or more aggressive competition, which could impact the projected sales and profitability of the new shirt line.

Book Recommendations:

"Financial Modeling and Valuation" by Paul Pignataro $-$ Provides insights into creating detailed financial models, crucial for effective capital budgeting.

"Retail Marketing Strategy: Delivering Shopper Delight" by Constant Berkhout $-$ Offers strategies for succeeding in the evolving retail market, relevant to Bhatia Textiles$$ expansion.

"Strategic Corporate Finance: Applications in Valuation and Capital Structure" by Justin Pettit $-$ Explores advanced concepts in finance that can be applied to capital budgeting and investment decisions.The project is estimated to be

Discussion Questions

Why are capital budgeting decisions important for a business firm? Discuss their concept and significance.

List the types of information generally required for evaluating the capital budgeting decisions of a firm from a financial standpoint.

What is meant by the Net Present Value $($NPV$)$ technique? Discuss its key assumptions and calculation methodology $($including an estimation of the discount rate$).$

Explain the concept of the Internal Rate of Return $($IRR$).$ What is the criterion generally used by firms while accepting or rejecting a capital budgeting project on the basis of the IRR technique?

On the basis of the financial information given in the case, calculate the after$-$tax operating cash flows, NPV$,$ and IRR under the Optimistic and Expected scenarios. Clearly specify the calculations required for the same.

Based on your analysis, as Saurabh Sharma, what recommendation would you make on whether the company should undertake the project or not? Clearly specify the decision based on both the NPV technique as well as the IRR criterion.