Defending a Project Report: The Gaya Cold-Press Oil Unit
Two commerce graduates in Gaya have applied for a bank loan for a cold-press mustard oil unit. A consultant's project report, for which they paid ₹18,000, claims monthly sales of ₹2.4 lakh and a net profit of ₹85,000 on a project cost of ₹9.5 lakh, financed by a ₹4 lakh term loan at 12% repayable over 60 months, ₹4 lakh of their own savings and ₹1.5 lakh from a relative. The report assumes 26 working days a month at 100 kg of mustard seed a day, 32% oil recovery and 68% cake, oil sold at ₹165 a kg and cake at ₹20 a kg, seed bought at ₹52 a kg, and monthly expenses of ₹6,000 for electricity, two workers at ₹9,000 each, ₹8,000 rent and ₹7,000 for packaging and transport. It shows no interest, no depreciation and no working-capital gap, and assumes the entire output is sold from day one. The bank has asked the two graduates to defend the report.
1. Recompute the monthly operating result using the report's own assumptions. What do you conclude about the claimed ₹85,000 profit?
Read the worked answer
Output: 100 kg seed × 26 days = 2,600 kg a month. Oil at 32% = 832 kg; cake at 68% = 1,768 kg.
Revenue: oil 832 × ₹165 = ₹1,37,280; cake 1,768 × ₹20 = ₹35,360; total ₹1,72,640. Seed cost: 2,600 × ₹52 = ₹1,35,200. Gross margin: ₹1,72,640 − ₹1,35,200 = ₹37,440. Other costs: ₹6,000 + ₹18,000 + ₹8,000 + ₹7,000 = ₹39,000. Operating result: ₹37,440 − ₹39,000 = −₹1,560, a small loss even before financing. EMI on ₹4,00,000 at 12% for 60 months ≈ ₹8,900. Net monthly result ≈ −₹10,460, before any depreciation on ₹9.5 lakh of plant.
Two findings follow. First, the report's ₹2.4 lakh sales figure is about 39% higher than its own capacity, recovery and prices can produce (₹1.73 lakh) - the numbers are internally inconsistent, and the ₹85,000 profit is not derived from them at all. Second, the project loses money at its own stated prices. The graduates should not defend the report; they should withdraw it, tell the bank the truth, and rework price, seed cost and recovery before applying again.
2. What selling price per kg of oil is needed to break even after paying the EMI? Show the calculation and interpret the result.
Read the worked answer
Total monthly cash needed = seed ₹1,35,200 + other costs ₹39,000 + EMI ₹8,900 = ₹1,83,100. Cake revenue at ₹20 = ₹35,360, so oil must bring in ₹1,83,100 − ₹35,360 = ₹1,47,740. Required oil price = ₹1,47,740 ÷ 832 kg = ₹177.6, i.e. about ₹178 a kg - roughly ₹13 above the report's ₹165.
Before EMI the break-even is ₹1,74,200 − ₹35,360 = ₹1,38,840 ÷ 832 = ₹166.9, i.e. ₹167 a kg.
Interpretation matters more than the arithmetic. Break-even assumes 100% capacity use and that every kilogram of cake is sold from day one, so the true break-even is higher than ₹178. And ₹178 is above the ordinary wholesale price of mustard oil in most Bihar markets. The project therefore earns nothing unless the unit can sell at a retail or cold-press premium, buy seed directly from growers below ₹52, or lift recovery above 32%. A ₹13 margin on ₹165 is about 8% - this is a project in which a first-time operator must control price and yield from week one, not one in which the consultant's figures can be assumed.
3. Identify the two assumptions most likely to fail and state the field test you would use for each.
Read the worked answer
Assumption 1 - full capacity and full sales from day one. A new brand rarely sells 832 kg of oil in its first month. Field test: list the retail shops and eateries within 10 km, ask three of them what volume of unpackaged mustard oil they sell in a week and at what price, and get two to state in writing what quantity they would buy from a new unit at ₹165–₹178.
Assumption 2 - 32% oil recovery. Recovery depends on seed variety, moisture, foreign matter and the ghani setting; a poor lot can fall well below 30%. Field test: take a 50 kg sample to two existing cold-press units, have it crushed, weigh the oil actually obtained, and buy seed only on a recovery-tested basis.
A third, quieter assumption is the ₹7,000 for packaging, transport and selling outside the district, which is usually understated, and the 26-day month, which ignores festivals and power cuts.
The general principle for the answer: a project report is a set of guesses. Feasibility means finding the three or four guesses on which profit depends most - here price, recovery and utilisation - and testing those in the field rather than accepting them on paper.