One Hundred and Twenty Thousand Kwacha
Yamikani is 19 and passed his MSCE with five credits but has no money for college. His sister gives him MK 120,000 as once-off capital. He is considering two plans. Plan A: rent 0.2 hectares and grow tomatoes; inputs MK 45,000, hired labour MK 20,000, land rent MK 10,000 and transport MK 15,000; he expects about 40 buckets. Tomatoes sold in December fetch about MK 3,000 a bucket; by April the same bucket fetches about MK 800. Plan B: buy maize at harvest at MK 180 per kg and store it for five months, when prices reach about MK 350 per kg; storage chemicals and bags cost MK 12,000 and he should expect about 10 per cent loss to weevils. He must also pay MK 25,000 of school fees for his young brother in February. A village savings group offers him MK 100,000 at 10 per cent per month, repayable in four months, and a trader offers to buy all the tomatoes now on three-week credit.
1. Calculate the likely outcome of Plan A and Plan B using these figures, and recommend what Yamikani should do, with reasons.
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Plan A (tomatoes). Total cost = 45,000 + 20,000 + 10,000 + 15,000 = MK 90,000. Break-even price = 90,000 / 40 = MK 2,250 per bucket. At the December price: 40 x 3,000 = MK 120,000, so net = MK 30,000. At the April price: 40 x 800 = MK 32,000, so net = a loss of MK 58,000. Plan A pays only if the crop reaches market in the high-price window; a late harvest or transport delay wipes out the margin.
Plan B (maize). 120,000 / 180 = about 667 kg bought. After a 10 per cent loss, about 600 kg remain. Revenue = 600 x 350 = MK 210,000. Costs = 120,000 + 12,000 = MK 132,000. Net = MK 78,000 over about five months.
Judgement. Plan B returns more than twice as much and cannot fail as completely as a spoiled tomato crop, but it locks up all his capital and pays out after February, when MK 25,000 of fees fall due. Plan A brings cash in December but carries severe price and timing risk.
Recommendation: split. Put about MK 70,000 into maize (about 389 kg, roughly 350 kg after loss, worth about MK 122,500 at MK 350), leave MK 25,000 untouched for the fees, and use about MK 25,000 for a small, quick vegetable plot. This diversifies, protects the fee money, and lets him learn both enterprises.
2. Evaluate whether Yamikani should take the savings group loan at 10 per cent per month, showing your calculation for each plan.
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Cost of the loan. At 10 per cent per month simple interest on MK 100,000: MK 10,000 per month, x 4 months = MK 40,000 - that is 40 per cent of the loan, and it falls due before either enterprise has fully matured.
Applied to Plan A. Total cost becomes 90,000 + 40,000 = MK 130,000, against a best-case revenue of MK 120,000. That is a loss of MK 10,000 even if the December price holds. The finance cost alone is larger than the whole net margin of MK 30,000. Verdict: no.
Applied to a larger maize trade. Investing MK 220,000: about 1,222 kg bought, about 1,100 kg after loss, revenue about MK 385,000, total costs about MK 272,000, net about MK 113,000. The arithmetic works - but repayment falls in month 4 and the sale in month 5, so he would have to sell early, at a lower price, precisely when maize is cheap. Verdict: only if repayment is moved to month 6 or part of the stock is sold early by design.
General rule. Borrowing is justified when the expected return over the loan period clearly exceeds the interest and repayment falls after the income arrives. At 40 per cent over four months, this loan is a last resort, not free capital.
3. The trader offers to buy all the tomatoes now on three-week credit. Identify the risks and say what Yamikani should do to protect himself.
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Risks. Credit means he delivers goods and receives a promise. If the trader delays payment, disputes the quality, or disappears, Yamikani has no crop and no money. There is no written agreement and probably no witness, so he cannot prove the price or the quantity. Taking payment three weeks later also means he cannot respond if a better price appears, and he loses the bargaining position that comes from holding a perishable crop in demand. If he has borrowed, the loan repayment date may arrive before the trader pays him.
What to do. Put the deal in writing: quantity, grade, unit price, total, payment date and what happens if payment is late, signed by both and witnessed by someone respected. Take a deposit or part payment on delivery. Deliver in identifiable batches with a signed delivery note, keep a simple record book of every bucket, and photograph or count the load. Find out whether the trader has paid others on time; if not, do not rely on him alone.
Alternative. Sell part of the crop for cash to a second buyer and place only the surplus on credit. Spreading buyers is the same principle as spreading enterprises - no single failure should be able to take everything.