The Paper-Bag DPR Under Bank Scrutiny
A young promoter in Cuttack prepares a detailed project report for a paper-bag unit. Project cost is ₹48 lakh: plant and machinery ₹25 lakh, building ₹10 lakh, miscellaneous fixed assets ₹8 lakh, and working-capital margin ₹5 lakh. Means of finance: term loan ₹30 lakh at 11% with a six-year repayment, a 15% subsidy on plant and machinery (₹3.75 lakh), and promoter contribution ₹14.25 lakh. Projected annual sales are ₹72 lakh at 60% capacity in year one. Variable costs are 60% of sales; fixed cash costs excluding interest are ₹9 lakh; depreciation is ₹2.5 lakh. Annual principal repayment is ₹6 lakh. The promoter projects 25% sales growth each year and claims the unit will break even in the first month. There is no competitor analysis, no working-capital cycle, and the subsidy is already shown as cash in hand. The bank asks for a viability note.
1. From the figures given, compute contribution, PV ratio, break-even sales and DSCR. Comment on viability and on the promoter's claim of first-month break-even.
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Contribution and PV ratio. Sales ₹72 lakh; variable cost 60% = ₹43.2 lakh; contribution = ₹28.8 lakh; PV ratio = 40%. Fixed cash costs excluding interest = ₹9 lakh; interest = 11% of ₹30 lakh = ₹3.3 lakh. Cash fixed costs = ₹12.3 lakh. BEP sales = 12.3 / 0.40 = ₹30.75 lakh, or 42.7% of projected sales. Depreciation ₹2.5 lakh gives an accounting break-even of (12.3 + 2.5)/0.40 = ₹37 lakh.
DSCR. PAT before tax = 28.8 − 9 − 3.3 − 2.5 = ₹14 lakh. DSCR = (14 + 2.5 + 3.3) / (3.3 + 6) = 19.8 / 9.3 = 2.13. Even with 25% tax, PAT is ₹10.5 lakh and DSCR is about 1.75.
Comment. The unit is viable on these assumptions, with a comfortable margin of safety. But the DSCR is only as good as the sales assumption; a 20% sales shortfall cuts contribution by ₹5.76 lakh and DSCR to roughly 1.3. The promoter's claim of first-month break-even is false: at 60% capacity the unit operates above BEP, but break-even itself requires ₹30.75 lakh of annual sales, not one month.
2. Identify three weaknesses in the DPR beyond the numbers and explain how each should be fixed before submission.
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Weaknesses. (1) The 25% annual growth is asserted without orders, distributor tie-ups or a market survey; paper bags face competition from established units and from plastic alternatives. (2) The 60-day working-capital cycle is missing: if debtors take 60 days on ₹72 lakh sales, receivables are about ₹12 lakh, far above the ₹5 lakh margin. (3) The subsidy is treated as cash in hand before sanction and disbursement; if delayed, the promoter must fund the gap. (4) There is no sensitivity analysis for paper price, power or wage increases. (5) No competitor or pricing analysis supports the ₹72 lakh sales figure.
Fixes. Add a month-wise cash-flow statement, a 60-day receivables assumption, a sensitivity table for ±20% sales and +10% raw material cost, and written orders or MOUs before submission. Show the subsidy as a receivable, with a bridge loan or higher promoter contribution. The bank will also want a promoter CV and a machinery quotation.