(a) Moon Ltd. wants to replace its labour-intensive manufacturing facility. The company is evaluating a project to install a machining system. It is estimated that the system will result in annual savings of ₹ 13,50,000 in wages, ₹ 4,50,000 in superv

Question

(a) Moon Ltd. wants to replace its labour-intensive manufacturing facility. The company is evaluating a project to install a machining system. It is estimated that the system will result in annual savings of ₹ 13,50,000 in wages, ₹ 4,50,000 in supervisory cost, ₹ 1,50,000 in material losses during production, ₹ 1,20,000 in inventory cost and ₹ 90,000 in other operating costs.

The machining system is likely to cost ₹ 22,50,000 and will require an installation cost of ₹ 1,50,000. Its useful life is estimated at 5 years. To operate the system, the company requires the services of two trained operators at an annual salary of ₹ 4,50,000 each. Its annual repairs and maintenance cost is likely to be ₹ 1,20,000. Assuming that the corporate tax rate is 30% and the required rate of return is 12%, suggest Moon Ltd. whether it should accept the project or not.

The PVF of an annuity @ 12% for 5 years is 3·605. (20 marks)

(b) The following information has been extracted from the records of X Ltd. engaged in large-scale customer retailing. You are required to forecast its working capital requirements for the year 2022-23. One year constitutes 52 weeks:

Projected annual sales—₹ 87,81,500
Percentage of net profit on cost of sales—30%
Average credit allowed to debtors—14 weeks
Average credit allowed by creditors—7 weeks
Average inventory carrying (in terms of sales requirements)—12 weeks
Add 15% of the computed figures to allow for contingencies (15 marks)

(c) What is a mutual fund? Discuss the types of mutual fund prevalent in India. (15 marks)

UPSC Answer Check · Accepted Answer

The directive 'suggest' in part (a) requires a clear recommendation based on NPV/IRR analysis, while parts (b) and (c) demand calculation and descriptive exposition respectively. Allocate approximately 40% time to part (a) given its 20 marks and computational complexity, 30% to part (b) for working capital forecasting, and 30% to part (c) for mutual fund classification. Structure with clear sub-headings for each part, showing all workings for numerical sections before synthesizing into recommendations.
- Part (a): Correct identification of incremental cash flows—annual savings (₹21,60,000) minus incremental operating costs (₹10,20,000) = ₹11,40,000 pre-tax; depreciation on ₹24,00,000 over 5 years; tax shield calculation; NPV computation using PVF 3.605 and final accept/reject recommendation
- Part (a): Treatment of initial outlay (₹24,00,000) and verification that salvage value is zero; correct application of 30% tax rate on taxable income and discounting at 12%
- Part (b): Conversion of profit on cost to cost of sales ratio (100/130); calculation of weekly sales and cost of sales; debtors at 14 weeks, creditors at 7 weeks, inventory at 12 weeks; gross working capital before and after 15% contingency provision
- Part (b): Clear presentation of operating cycle components and net working capital position; understanding that inventory in 'sales requirements' terms needs conversion to cost terms
- Part (c): Precise definition of mutual fund as pooled investment vehicle with SEBI regulation; classification by structure (open-ended, close-ended, interval) and by investment objective (equity, debt, hybrid, solution-oriented, others)
- Part (c): Specific Indian examples—SBI Bluechip Fund, HDFC Corporate Bond Fund, Nippon India ETF, Balanced Advantage Funds; mention of AMFI role and recent SEBI categorization norms (2017)
- Cross-cutting: Integration of capital budgeting decision with working capital implications; recognition that project acceptance in (a) would alter working capital needs

Dimension	Weight	Max marks	Excellent	Average	Poor
Demand-directive understanding	15%	7.5	For (a), interprets 'suggest' as requiring explicit NPV-based accept/reject recommendation with sensitivity awareness; for (b), recognizes forecasting requires operating cycle decomposition; for (c), understands 'discuss' demands both definition and systematic classification with Indian context	Addresses each part but treats (a) as pure calculation without recommendation, or (c) as list without elaboration; misses that 'suggest' implies justification of decision	Misreads directive—attempts to 'evaluate' in (a) without numerical basis, or describes without calculating in (b); confuses mutual funds with other collective instruments in (c)
Content depth & accuracy	25%	12.5	Part (a): Correct NPV = ₹3,87,780 (approx) with all cash flows accurately computed; depreciation tax shield properly applied; part (b): Cost of sales ₹67,55,000, working capital requirement ₹18,63,150 before contingency, ₹21,42,623 after; part (c): Covers minimum 5 SEBI categories with characteristics	Minor computational errors in (a) or (b)—e.g., wrong depreciation base, incorrect cost/sales conversion, or partial mutual fund classification missing hybrid/solution-oriented funds	Fundamental errors—ignores tax in (a), uses sales instead of cost in (b) inventory, or equates mutual funds with fixed deposits; missing entire categories in (c)
Structure & flow	20%	10	Clear tripartite structure with visible sub-headings; within (a), shows: initial investment → annual cash flows → depreciation schedule → tax computation → NPV → decision; (b) presents stepwise working capital build-up; (c) uses tabular or hierarchical classification	All parts present but poorly demarcated; calculations embedded in paragraphs without tabular presentation; some logical gaps between steps	Disorganized—mixes parts (a) and (b), no visible working for calculations, or (c) as unstructured narrative without classification scheme
Examples / case-law / data	20%	10	In (c), cites specific Indian mutual funds (e.g., Axis Bluechip Fund, ICICI Prudential Balanced Advantage Fund) and references SEBI Mutual Fund Regulations 1996/2017, AMFI codes; in (a), optionally notes comparable Indian manufacturing automation cases; in (b), contextualizes with retail sector norms	Generic examples in (c) without specific fund names; or mentions SEBI without regulatory specifics; numerical parts lack contextual illustration	No Indian examples in (c); or invents non-existent fund types; complete absence of regulatory framework awareness
Conclusion & analytical edge	20%	10	Part (a): Explicit 'accept' recommendation with NPV>0 justification and brief note on limitations (e.g., real options, qualitative factors); part (b): Interpretation of working capital intensity for retail sector; part (c): Critical comment on mutual fund growth in India (AUM trends) or investor protection concerns	States conclusion in (a) without justification; (b) ends at calculation without interpretation; (c) purely descriptive without critical insight	Missing conclusion in (a)—leaves decision implicit; or recommends against positive NPV; (c) lacks any forward-looking or evaluative element

(a) Moon Ltd. wants to replace its labour-intensive manufacturing facility. The company is evaluating a project to install a…

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