Case Study-3 Investment Policy The company keeps on increasing the production capacity from time to time to cope

up with the rising demand. During the year 2005-06, the company added Rs 399 crore in fixed assets to expand the manufacturing capacity. The production capacity of Gurgaon plant was increased from 5,000 to 6,500 units a day in the previous year. To tap the increasing demand for the motorbikes, the company decided to carry the process of expansion further and increase the capacity at the Dharuhrea plant to 6,500 units by the fall of 2006. This would take the installed capacity to roll out 13,000 units a day. This capacity expansion will take care of the growing demand in the short run. The company is in the process of setting up a third plant to take care of the demand in the medium term as it would also enable the company to realize its mandate of becoming a global scale and world class manufacturer. A state of the art manufacturing plant with an investment of Rs 400 core to be operational by mid 2007 at Haridwar with an initial production capacity of 5,00,000 is proposed. Besides, the company, in order to improve its efficiency and to cut down the cost, has made investment in augmenting its welding capacity. The company has also invested in technology that will help in localizing the production of gear boxes. By 2010, Hero Honda and its ancillaries will invest Rs 1,900 crore in the new plant, achieving a capacity expansion to 15 lakh units, thereby enabling the company to cater to future market demand and consolidate its market leadership. Question 1. Is investment policy driving the growth of the firm? What are the key issues that the investment policy of the company is trying to address? (P.17) Case study-4 United Banks Business Rahul was working for United Bank, a medium sized bank in a small town. The bank was increasing its thrust to capture business in the small business segment and was coming out with innovative packages of financing to fulfill the needs of small traders whose requirements were being ignored by large multinational banks. In one of its schemes the bank had decided to finance small traders based on their average weekly sales. One of the clients of the bank namely, Kwality Stores, was managed by Mr Krishna talwar. The store sold a variety of merchandize and deposited all its sales on a weekly basis to the United Bank. Mr Talwar enjoyed a good relationship with Rahul. To promote his younger brother, Mr Talwar was planning to open a similar store named as Excellent store in the adjacent colony. According to his estimates, the new store needed a working capital to the extent of two weeks of sales. The sales of the new store would be about 75% of the sales of Kwality Stores. Due to frequent festivals the sales of the stores exhibited fair amount of volatility, which was expected to continue for the new store too. As the sales fluctuated wildly the requirement of the working capital would change from period to period. Mr Talwar approached Rahul for help.

Rahul was too pleased to fin a walk in customer to meet his targets in the banking business. He informed Mr Talwar of the requirements of the bank to provide funds. The United Bank was willing to finance 50% of the requirements of funds by way of a loan with balance to be contributed by the promoter. The method of arriving at working capital was as follows: 1. Normal limit would be equal to 50% of the average sales of two weeks, which utilized or not, would carry interest at 13% per annum. 2. In order to meet the enhanced working capital requirements during festivals, United Bank would provide additional funds. This would be met by way of providing a peak limit, which will be computed based on standard deviation of 1.50 of the sales. 3. Any additional amount used for working capital for Excellent Traders, Mr Talwar provided him with the following weekly data of sales of Kwality Traders: Weekly sales of Kwality Stores for past one year (Rs in 000)
Week 1 2 3 4 5 6 7 8 9 10 11 12 13 Sales 135 400 196 258 354 120 78 96 364 223 198 146 188 Week 14 15 16 17 18 19 20 21 22 23 24 25 26 Sales 225 165 144 98 113 149 256 274 356 389 162 165 123 Week 27 28 29 30 31 32 33 34 35 36 37 38 39 Sales 91 332 229 298 335 146 198 173 228 263 194 225 239 Week 40 41 42 43 44 45 46 47 48 49 50 51 52 Sales 322 398 146 122 189 236 294 336 198 233 155 95 162