What are thehidden (undirected) issues that arise from a detailed analysis.
Identify accounting issues (GAAP/IFRS compliance issues), assess their implications, generate alternatives, and provide recommendations within the bounds of GAAP/IFRS to meet the client's needs.
How accounting standards impact financial measures (ratios, covenants, etc.).
How to show a coherent report and integrated analysis that meets specific user needs.
In April 2013, Rajiv Shanna had a business plan. For quite some time, he had been doing some market research exploring the potential of his \"dream project" establishing a y ash brick manufacturing unit and had seen huge potential for prot in the project. His long-time friend Alok Gupta was also interested but had a few doubts regarding the feasibility of the project. Sharma, on the other hand, was sure of his plan. Years of work in the construction industry had shown him the potential of using large volumes of y ash bricks in construction, especially in housing and infrastructure projects. On the basis of preliminary analysis, he decided to set up a plant that would have the capacity to manufacture four million bricks per year. Though actual production would depend on market demand, the partners estimated that 2.4 million bricks could be sold per year at an average selling price of Rs'?r",000I per 1,000 bricks. He wanted to ascertain the feasibility of the project using a cost-volume-prot (CVP) analysis. BACKGROUND Fly ash was a residue obtained aer combustion of coal. India utilized huge quantities of coal to produce thermal power, its major power generation source. When pulverized coal is burned to generate heat, the residual product contained up to 80 per cent y ash. The y ash from the exit ue gas was collected at various stages of the ue gas path and at the dust collectors tted before the nal chimney. Market trends revealed that coal would continue to be used as the prime fuel for many more years, resulting in a great amount of y ash generation. One challenge for the disposal of the y ash produced was the need for a massive amount of land, since it was usually dumped on the ground as a waste material. It was estimated that the land requirement for this dumping would be nearby 1,000 square kilometres of land by the year 2015.2 Looking at the vast volumes of y ash produced, and the fact that Indian coal contained high ash content (to the level of 30 to 50 per cent), it was necessary to devise effective uses for it. Accordingly, y ash was analyzed for its appropriateness in various uses such as manufacturing of ceramic tiles, bricks, building materials, etc. Fly ash as a construction material was considered appropriate on two accounts. First, there were environmental concerns about the traditional way of making bricks from clay that comprised topsoil. Removing this top layer makes the land infertile for a long period. Using y ash for making bricks instead of clay would thus help preserve the fertility of the soil. Second, it was estimated that there would be a substantial shortfall in the availability of different types of building materials, including bricks.3 With the country growing at such a rapid pace, the government was keen on promoting y ash bricks in the construction sector. This would enable a waste product to be used as a construction material and also conserve the environment and resources. MANUFACTURING PROCESS The National Thermal Power Corporation (NT PC) of India had developed technology to replace burnt clay bricks with y ash as a construction material for building walls. The manufacturing process for these bricks, known as y ash-lime-gypsum bricks, required intimate mixing of y ash, sand, lime and gypsum. Gypsum and lime were rst ground to ne particles and then y ash and sand added to make a ne blend. The ratio of the input material was as follows: Fly ash: 60 to 80 per cent Sand: 10 per cent Gypsum: 10 per cent Lime: 10 to 20 per cent Water was added to the mix to form a paste after which the mixture was transferred to moulds tted in a hydraulici'mechanical press. The bricks were later dried in the open for one or two days and then cured using water. A process outline for manufacturing y ash bricks is given in Exhibit 1. NTPC established pilot ash brick manufacturing plants at its 13 thermal power plants. Approximately 150 million bricks had already been manufactured in these plants and used for in-house consumption. To guarantee the quality of manufactured bricks, it was suggested that the new brick manufacturing plants follow the guidelines of the quality stande of IS 123941990.4 SHARMA'S BRICK PROJECT Shanna was trying to convince Gupta to agree to his business idea. To strengthen his argument, Shanna referred to a portion of the address of Dr. Abdul Kalam, a former Indian president, who had met concerns over the disposal of y ash by saying: . . . the use of coal for power generation results in increased quantum of y ash production, which has reached over 100 million tonnes per year. All-out efforts are needed to utilize this y ash not only for environmental considerations, but also to avoid land usage for y ash dumping. Though there has been a steady progress in y ash utilization from 1990, we have a long way to go to reach the target of 100 per cent y ash utilization. It is reported that the agricultural increase of grains is around 15 per cent, green vegetables 35 per cent and root vegetables 50 per cent when y ash is mixed with the soil. Toxicity tests have proved that there is no toxic element due to y ash. But it has higher nutrients due to increased availability of iron and calcium. The y ash can become a wealth generator by making use of it for agriculture and producing \"green building" materials. Presently, the y ash utilization is in the range of 40 million tonnes per year providing employment for over 50,000 personnel. At the full utilization of the generating stock, this will provide employment potential for 300,000 people and result in a business volume of over Rs40,000 million per year? After considering this speech, the two iends continued to discuss the project. Gupta: I think it's a great idea to use y ash to manufacture bricks. The availability of y ash, I guess, will never be a problem Nearly three-fourths of the installed power generation capacity of India comes from thermal plants, in 90 per cent of which coal is used as the primary le]. As long as coal is used to generate thermal power, the residual product y ash will continue to be produced. Sharma: Exactly. You do see there is a huge business potential. The current prevalent method of its disposal, primarily dumping, requires large areas of land. On top of that, currently the thermal power plants are generating 100 million tonnes of y ash per year in India, and such an enormous quantity is creating difficulties for disposal and an ecological menace. According to an estimate that I read, dumping of y ash would need 1,000 square kilometres of land by 2015. Looking at such potential hazards, the central and state governments are trying to encourage such units. This could be a good opportunity for us. Think of it, y ash is available in huge quantities at a cheap rate, the government is enthusiastic about it and there is a huge demand for it, plus we have experience and contacts in the construction sector. What more can anyone want? What do you say? Gupta: Yes . . . you were doing some research on its market potential? Sharma: Yes, I did that. Ok. Let me show you the market potential. Sharma then presented a power point display of the following points. Market Potential The annual demand for clay bricks for construction purposes was estimated to be 180 billion tonnes that required almost 340 billion tonnes of clay annually. Production of clay bricks required clay that resulted in leeching the fertility of the land in the long run. With construction progressing at a very fast pace, the government was keen to develop a regular supply of bricks without causing damage to the soil. The use of y ash in such circumstances was a priority. The quality and durability of y ash brick were considered very suitable for application in various construction projects. A large quantity of y ash was available as waste material from thermal power plants. The government was encouraging manufacturing of y ash bricks, and various concessions were given to such manufacturers. Further, these bricks were factory-made by mixing the ingredients with water without consuming thermal energy. Manufacturers of construction materials had also begun to note the importance and application of y ash bricks. They knew that with an increase in construction activities, there would be an equally rising demand for bricks. The housing sector was predicted to experience a shortage of 20 million to 70 million home units, which presented a ripe market for the use of cheap y ash as a raw material in construction. On the basis of such preliminary analysis, Shanna decided to set up a plant that would have the mpacity to manufacture four million bricks. He presented the calculations for discussion. Investments Required Shanna: Alok, at the outset we require Rs8 million as an initial investment in xed assets. Here, take a look at the costing [he hands over a sheet of paper. According to my estimate, the major expenses would be in transport vehicles and machinery. The building modications will require approximately Rsl.40 million. The water supply arrangements will be another minor expense. Gupta examined the table illustrating the estimated expenses (see Exhibit 2). Shanna: In addition to the above investments, I have estimated the working capital requirements, which are expected to be approximately Rs2 million. Other routine expenses are estimated as follows [see Exhibit 3]. Have a look. [He hands over another sheet of paper]. By the way, there would be the other operating expenses related to the volume of production. These are essentially the raw materials, electricity and labour for making the nal product. According to my estimates, the cost of major raw materials, energy requirements and labour would be Rs900,000 per month (see Exhibit 4). Shanna handed the estimates of the manpower costs to Gupta (see Exhibit 5). Sharma himself would work as production manager, since hiring another person for the post would cost them Rs50,000 per month. Gupta was puzzled and wanted to ascertain more clearly the feasibility of the project. They agreed to consult expert to evaluate their business plan. FINAL DECISION A detailed discussion followed the conversation. Although the proposed plant had the capacity to produce four million bricks per year, actual production would depend on market demand. Further, output would decline in case of any breakdowns of plant and equipment. Finally, the partners estimated that a sales volume of 2.4 million bricks could be sold per year at an average price of Rs?,000 per 1,000 bricks. The initial investment would cost them R510 million, out of which Rs6 million would be invested by the partners from their own resources. A local bank had agreed to provide a loan for the balance at an interest rate of 12 per cent per annum against the mortgage of the equipment. Shanna would work full time in the business and would draw a salary of Rs50,000 per month. The life of the project was estimated to be ve years. The salvage value of the plant and equipment at the end of ve years would be negligible and could be ignored. However, investments in the working capital would be recovered in full. Before actually investing, the partners requested a consultant to review their business plan. EXHIBIT 1: FLY ASH BRICK MANUFACTURING PROCESS Fly Ash Lime Gypsum Sand Mixer V Conveyor V Brick Making Machine (Press) V Transportation Dry Curing V Wet Curing V Drying Inspection Sorting V Dispatch Source: Compiled by authors. EXHIBIT 2: ESTIMATED INVESTMENT IN INDIAN RUPEES Building Modification 1,400,000 Water supply arrangements 100,000 Machinery 2,000,000 Trucks 3,000,000 Payload machine 1,500,000 Total 8,000,000EXHIBIT 3: ROUTINE EXPENSES PER MONTH IN INDIAN RUPEES Building rent 50,000 Administrative cost 10,000 Office supply 5,000 Electricity (for lighting) 10,000 Miscellaneous 20,000 Source: Compiled by authors. EXHIBIT 4: EXPENSES RELATED TO VOLUME OF PRODUCTION PER MONTH IN INDIAN RUPEES (FOR 0.20 MILLION BRICKS) Fly ash 250,000 Gypsum 250,000 Lime 300,000 Sand 40,000 Electricity 10,000 Labour 50,000 Total 900,000 Source: Compiled by authors. EXHIBIT 5: PERSONNEL COSTS PER MONTH IN INDIAN RUPEES Workers 100,000 Office assistant 20,000 Watchman 15,000 Drivers 25,000
