Question: How does the volume affect the return on equity and return on investment? Nipponply is planning to use the capacity at a level of 85 per cent and 100 per cent in years two and three, respectively. How does this decision affect the return on investment and return on equity? Also calculate the return on investment and return on equity if Nipponply use the capacity at a level of 65 per cent.

Background Information:

Thakkar's initial decision was to pursue a business plan that had a trading capacity of 45,000 units per year, but the actual production had to be based on market demand Thakkar estimated that, ultimately 29,250 units could be sold per year at an average price of 200 per unit. Nipponply could produce 29.250 units with 65 per cent capacity utilization (ie., the lowest level of capacity). For the second and third year, Thakkar estimated that Nipponply would have 38.250 units and 45,000 units with 85 per cent capacity utilization (a moderate level of capacity) and 100 per cent capacity utilization (the highest level of capacity), respectively The initial investment in the project would cost 29.965 million, of which t21 915 million would be drawn from the firm's own resources; the rest would come from a bank loan at an interest rate of 11 per cent (see Exhibit 7). The life of the project was estimated to be fifteen years. The salvage value of the IT infrastructure, plant, and machinery at the end of fifteen years would be negligible and therefore could be ignored. The salvage value of the building machinery at the end of fifteen years would be t250,000 EXHIBIT 3: EXPENSES RELATED TO THE VOLUME OF SALES PER MONTH (FOR 3,750 UNITS) Amount (E) 6,682,500 165,000 82,500 82,500 7.012,500 Particulars Manufacturing cost Advertising expense Promotional expense Electricity expense Total expenses Source: Created by the case author based on company documents. EXHIBIT 4: ESTIMATED INVESTMENT Particulars Amount () Plant and machinery Building Other miscellaneous assets (i.e., inventory) Total investment 1,575,000 1,250,000 26,100,000 200,000 29,125,000 Source: Created by the case author based on company documents. EXHIBIT 5: ROUTINE EXPENSES PER MONTH Particulars Amount () 20,000 5,000 40,000 5,000 70,000 Administrative costs Office supplies Miscellaneous Total monthly expenses Source: Created by the case author based on company documents. EXHIBIT 6: PERSONNEL COSTS PER MONTH Employee Designation Number of Employees Amount () Regional sales managers Business development managers Sales executives Office assistants Total monthly personnel costs 1,080,000 720,000 864,000 288,000 2,952,000 6 Source: Created by the case author based on company documents. EXHIBIT 7: CAPITAL STRUCTURE Source Amount () Equity Debt (bank loan) Total capital 21,915,000 8,050,000 29,965,000