Cooler Investment versus Continuing Milk Rejection
A farmer producer company collects 2,000 L/day from 150 members and sells all accepted milk to a private dairy at Rs 30/L. In summer, 12% of the milk is rejected because cans wait 4–6 hours before the tanker arrives; the rejected milk is returned and often spoils. The company is considering a 3,000 L bulk milk cooler with a backup generator. The installed cost is Rs 25,00,000. The bank will finance 70% at 9% annual interest for five years; the company will use Rs 7,50,000 of its own funds. With cooling, rejection is expected to fall to 3%, and the dairy has offered a quality bonus of Rs 0.50/L on all accepted milk for a two-year contract. Electricity, maintenance and operator cost is about Rs 1,000/day. The alternative is to continue as now and pay members from the lower realisations. Members are asking for a higher milk price immediately. The cooperative has no other cold storage.
1. Calculate the current annual loss from rejection and the expected annual net gain from the cooler before and after interest.
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Current: 2,000 × 12% = 240 L/day rejected; accepted 1,760 L/day. Revenue = 1,760 × Rs 30 = Rs 52,800/day. Annual loss from rejection = 240 × 30 × 365 = Rs 26,28,000. With the cooler: rejection 60 L/day, accepted 1,940 L/day, price Rs 30.50. Revenue = 1,940 × 30.50 = Rs 59,170/day. Gain = 59,170 − 52,800 = Rs 6,370/day = Rs 23,25,050/year. Operating cost = Rs 1,000 × 365 = Rs 3,65,000/year, so net operating gain = Rs 20,00,050/year. First-year interest on the loan (70% of Rs 25,00,000 = Rs 17,50,000 at 9%) is Rs 1,57,500, leaving about Rs 18,42,550 before principal repayment. The investment is clearly attractive.
2. Decide whether to recommend the investment, considering payback and non-financial risks.
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Recommend the investment. Simple payback on the total outlay is about Rs 25,00,000 ÷ Rs 18,42,550 ≈ 1.4 years, and on the company's own funds it is much faster. The cooler also reduces the daily uncertainty members face and protects milk quality in summer. The risks are the two-year bonus contract, possible power failure and maintenance. These are manageable with a written contract, a generator with fuel, a maintenance reserve and trained operators. Continuing as now means losing about Rs 26 lakh of potential milk income each year and paying members less. The decision should still be conditional on a written quality-bonus agreement and a demonstrated cooling trial.
3. What conditions should be placed on the loan and contract decision?
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Conditions should include: a signed two-year quality-bonus agreement specifying the price and payment timeline; a cooling trial showing milk reaches 4 °C within the required time; a maintenance contract for the cooler and generator; a reserve fund for repairs and loan repayment; daily temperature and volume records; a member education programme on clean cans and prompt delivery; and a clause on what happens if the bonus is withdrawn. The company should also confirm that the 3,000 L capacity covers peak arrival, not just average daily volume. These conditions protect cash flow and prevent the investment from becoming a debt burden if the private dairy changes its terms.