Question

Caselet (Questions 101-104): Shekhar, an MBA from Singapore, returned to his hometown of Jamshedpur. Jamshedpur had a population of 10 lacs and one of the highest per capita incomes among Indian cities. Shekhar loved music. While listening to his favourite song on satellite radio one day, he wondered if he could combine his passion with a business. A few weeks later, by coincidence, Music World called for expressions of interest from potential franchisees. Jamshedpur did not have a single good music store where residents could buy quality, variety, and the latest releases.

Music World wanted its franchisees to own at least 1200 square feet of space and invest Rs. 30 lacs. Profits were to be split in the ratio of 3:7 between Music World and the franchisee. Shekhar liked the idea of working with a well-known brand, but he worried whether Rs. 30 lacs was too much money to put in. He did not have the full amount and was thinking of borrowing from a bank. He checked with other Music World franchisees in towns like Patna and Ranchi, expecting similar footfall in Jamshedpur. A franchisee in Patna reported monthly sales revenue of Rs. 1 to 2 lacs, with a profit margin of 25 to 30 percent. Satisfied with this, Shekhar decided to go ahead.

He then began looking for space. Jamshedpur had three main areas: Bistupur, Sakchi, and Sonari, all connected by good roads. Bistupur was a business area with most of the high-end retail stores, shopped at by the upper-middle and higher classes, and was also the city's education hub. Sakchi was a growing lower-middle-class business area, while Sonari was mostly residential.

Shekhar preferred Bistupur, since it was where he did his own shopping. But he ran into problems there: space was hard to find, and rentals had touched Rs. 30 to 40 per square foot per month, compared to Rs. 15 to 20 per square foot per month in Sakchi and Sonari. A friend who lived in Sakchi told him that several branded outlets were opening up there, and that it looked like the fastest-growing market in Jamshedpur with the highest share of teenagers. Still, Shekhar was against Sakchi because of its "downmarket" image. He wanted to target the college-going crowd, and he expected to find them in Bistupur.

The high real-estate cost in Bistupur, set against his low opinion of the Sakchi market, left Shekhar confused. To think the decision through properly, he decided to drive down the Jamshedpur-Ranchi highway in his newly bought car.

Question: Suppose sales in Patna and Bistupur are likely to be the same, how many years would it take for Shekhar to recoup the investment (consider zero inflation)?

• A. Less than five years.
• B. Less than seven years.
• C. Less than eight years.
• D. May be never.

Hint:

Work out the franchisee's own share of profit at both ends of Patna's range, then compare to Rs. 30 lacs, and remember Bistupur's rent is not even in that range yet.

Answer 1

The Correct Option is D

Step 1: Understanding the Question:
We are told to assume Bistupur's sales will match Patna's, and asked how many years it would take Shekhar to recover his Rs. 30 lac investment, with zero inflation.

Step 2: Key Approach:
Find the franchisee's own yearly profit from the Patna figures (revenue times margin, then his 7-out-of-10 share), and see how many years of that profit are needed to reach Rs. 30 lacs, then check what this range of years actually tells us.

Step 3: Detailed Explanation:
Patna's monthly sales revenue ranges from Rs. 1 lac to Rs. 2 lacs, with a profit margin of 25% to 30%. So the shop's total monthly profit ranges from \(1 \times 0.25 = 0.25\) lacs at the low end to \(2 \times 0.30 = 0.60\) lacs at the high end. Profit is split 3:7 between Music World and the franchisee, so Shekhar keeps 70% of this: \(0.25 \times 0.7 = 0.175\) lacs a month at the low end, and \(0.60 \times 0.7 = 0.42\) lacs a month at the high end. Over a year, that is \(0.175 \times 12 = 2.1\) lacs at the low end and \(0.42 \times 12 = 5.04\) lacs at the high end. Dividing the Rs. 30 lac investment by these figures gives a payback of \(30 / 2.1 \approx 14.3\) years in the worst case and \(30 / 5.04 \approx 5.95\) years in the best case. So depending on where Bistupur actually lands within Patna's range, payback could be under six years or well past fourteen, a spread that straddles every specific option offered without settling on any one of them. On top of this, Bistupur's rent (Rs. 30 to 40 per square foot a month for the required 1200 square feet, or roughly Rs. 0.36 to 0.48 lacs a month) is far higher than Sakchi or Sonari, and this extra cost is not part of the Patna benchmark at all, so it would eat further into whatever margin the Patna numbers suggest, pushing the real payback out beyond even this wide range. Given this much uncertainty and the added downward pull from rent, no single number of years can be defended with confidence.

Step 4: Final Answer:
Because the payback period could plausibly run from under six years to well past fourteen, and Bistupur's own higher rent is not even counted in that range yet, the honest answer is that recovery of the investment cannot be pinned to a fixed number of years, and may not happen at all.
\[ \boxed{\text{May be never}} \]