In 2012, Professor Vasudev Rao, the Dean Administration of T.A. Pai Management Institute (better known as TAPMI)

Fantastic news! We've Found the answer you've been seeking!

Question:

In 2012, Professor Vasudev Rao, the Dean Administration of T.A. Pai Management Institute (better known as TAPMI) found himself at cross roads. After moving into this picturesque campus in 2010, one of the daunting issues was to find a solution to the problem of transportation for the inmates.
Having started in 1984 in the educational hub of Manipal, the TAPMI campus was shifted from the modest leased building located in the heart of the town to its own new campus 5 km away in the outskirts. This new location had limited access to public transport facilities. For the inmates of the campus to visit places of worship, or to get phones and laptops repaired, or just to eat out and enjoy the beauty of this small city [. . .] for everything, one had to reach Manipal. The only bus that plied along this route operated twice a day and this was not sufficient to meet the needs of the people staying in the campus. The other modes of public transport available were the autorickshaws but they charged exorbitant rates. Adding to this, the presence of steep gradients and curves along this route had forced TAPMI administration to prohibit the use of two wheelers by students.
Although Prof Rao had thought over this problem numerous times and he was aware of buying and leasing options for a minibus, he was not sure how to go about it.

T.A. Pai Management Institute (TAPMI):
TAPMI, one of the reputed B-schools in South India had a rich legacy of producing many big names in the corporate sector and its approach to academics had won accolades not only from the industry but even from its competitors It was only in 2009 that a fully residential sprawling new campus was established. It accommodated around 1,000 people in its three hostel blocks, 24 faculty and staff quarters. The need for frequent travel to Manipal/Udupi was all the more as the only mom-and-pop store located in the campus which catered to limited student needs, was grossly insufficient to meet the multi-cultural needs of the inmates.

Transportation to and from TAPMI:
One of the major problems faced at the new campus was its poor connectivity with Tiger circle, the nerve centre of Manipal. The distance of the nearby biggest city Udupi from the TAPMI campus was about 10 km. The buses which came towards TAPMI or nearby normally originated from Udupi and terminated at Manchi or Hirebettu. Manchi was located 3 km away from the campus and the people had to get down at Shanti agar bus stop to reach TAPMI by autorickshaws. (Exhibit 1). There were buses plying in this Manchi–Udupi route once in every 20 min but that did not help the TAPMI inmates to commute to the city. The bus going towards Hirebettu was en route TAPMI. This 48-seater bus operated from Hirebettu to Udupi twice a day, one in the morning at 8 a.m. and the other in the evening at 5.30 p.m.
The only transportation arrangement TAPMI had made on its own was a hired 20-seater minibus called “Sumukh” which picked up the staff members in the morning from Tiger circle to TAPMI and dropped them back in the evening at the same place after office hours. But this facility existed exclusively for staff use.

Transportation options:

Option 1: the Dean exploring options with bus operators:
The Dean wanted to explore the easiest option to solve the problem of transportation by negotiating with the existing bus operator. The sole bus operator Rajesh, the owner of the fleet “Krishna Prasad Travels”, had the permit to operate in the route from Udupi to Hirebettu en route TAPMI. The Dean requested Rajesh to increase the number of trips per day from two to five, i.e. at 12 p.m., 3 p.m. and 9 p.m. apart from the existing schedule. However, Rajesh was unwilling to extend the number of trips. According to him one of the reasons was that the PGDM programmes were fully residential and there was hardly any movement of students. Therefore it was not viable for him to operate trips throughout the day time. He felt it was not easy to make amendments in the existing route permit because there were buses plying from Udupi to Manipal side for every 4 minutes and even a minor change in one bus’s schedule could cause much disruption. Besides this point, the route was already cluttered and getting a new permit approved by the Regional Transport Authority (RTA) for additional trips from Udupi to Hirebettu side was next to impossible. Yet he expressed his willingness to operate a trip at 12 p.m. if a minimum number of passengers were guaranteed by the institute. Rajesh also pointed out that his bus made trips towards Udyavara (around 10 km south of Udupi) between the two trips it had towards TAPMI side. So any change might also disrupt that schedule.
The Dean tried to convince Rajesh by saying that even if the programmes were residential, the students are not fully engaged in classes throughout the day. Moreover the campus also housed faculty, staff and their family members who also were potential customers.
Rajesh was not convinced by the justification because the average occupancy was just about 50 per cent even for the current two trips. But he gave a suggestion to the Dean to have a meeting with Mr Shantharam Shetty who was the fleet owner of “Vishwajyothi” buses which plied towards Manchi both from Manipal and Udupi. The Dean after meeting Mr Shetty, gave him the same proposal as he had given Rajesh. Mr Shetty said that it was impossible for him to consider any extension of the trip at 3 p.m. because going to and fro Shantinagar to TAPMI can take minimum 10 min, and this delay could not be accommodated in the given scheme of things. However, he promised to consider extension of the last trip at 9 p.m. to Manchi via TAPMI, as it would not cause disruption in any other schedule. But for favourable consideration of that proposal, he requested the Dean to assure him a minimum number of passengers to cover his running costs.
Mr Shetty also recollected that the Badagabeetu village panchayat had requested him to operate a bus service in this 12 km route from Hirebettu to Udupi en route TAPMI. He further indicated that he was looking at the financial viability of buying a bus and operating in this route in three months’ time.
Mr Shetty sounded optimistic about paying an extra fee to the RTA for a new permit to TAPMI or Hirebettu but like Rajesh he was really not confident of breaking even on any day given the number of potential travellers. He said that with a huge road tax amount of about INR 750 per seat per quarter, about INR 34,000 annual insurance premium and high maintenance costs, bus operators were struggling to break even. Besides these, a driver’s daily wages was about INR 700, conductor’s wages INR 500 and the cleaner’s wages about INR 250 (Exhibits 2–4).

Option 2: TAPMI plans to buy the bus:
Prof Vasudev Rao was optimistic before meeting both these bus operators that some solution would emerge, but contrary to his expectation, no viable solution surfaced. So, he planned to present before the TAPMI Governing Council, a proposal to purchase a bus that would be operated between the institute and Tiger circle, Manipal, by the staff employed by TAPMI. For this purpose, he had taken quotations from various companies like Tata (Starbus), Force and Eicher. He called a meeting where the Manager Administration (Mr N.G. Nayak) and Manager Finance (Mr Jayakrishna) were asked to discuss different options that were available to the Institute.
The three options with varying seating capacities differed in their pricing. Going for the 32 seater meant there was risk of low occupancy for each trip while settling for the 20 seater had the risk of inadequate capacity. Tata (Starbus), a 26 seater, was priced at INR 1,042,242, while Force, a 20-seater model, was priced at INR 936,011. Eicher was a bigger bus with seating capacity of 32 and with a higher price tag of INR 1,348,500.
After deliberations, the three of them reached a consensus that going in for a five year bank loan at 11 per cent interest was the best financing option. Against the backdrop of unpredictable occupancy rate and possible expansion of student strength in the coming years, they were unable to decide on the seating capacity. Mr Nayak then intervened to point out the details of other costs involved in operation of Institute’s own vehicle.
He said that employing a driver normally cost around INR 9,000 per month as wages, while that for a cleaner it was about INR 6,000. Over and above the wages and diesel costs, there were other fixed expenses like maintenance costs, annual insurance premium of about INR 30,000, and annual road tax of INR 3,696 to be taken care of (Exhibit 4). He, however, added that maintenance costs after manufacturer’s warranty could now be covered under dealers extended warranty by paying a certain amount. The other issue was the possibility for upward revision of diesel prices (Exhibit 5). So, they were wondering if after meeting the loan expenses and bearing the fixed and the variable costs, the option would be a viable one.
Prof. Rao then felt that the charges to be levied from the users of the bus service were also a big question, particularly against the backdrop that an educational institute could not earn surplus from any source other than tuition fees. Doing so meant violating the laws in place. Although the buying option was a little expensive and could result in a monthly outgo from the Institute, he felt it would solve the transportation problem once for all and was optimistic that the governing council will give approval for buying the bus But in the meeting the Governing Council members were not convinced by the idea of buying the bus. Instead they suggested the option of leasing a bus.

Option 3: lease option:
Just when Prof. Rao was exploring the lease option his friend who was the Dean of another B-school had visited the campus. He shared his experience, as their problem was quite similar to what TAPMI was facing currently. On probing further, he suggested looking into the option of leasing the bus as the model was working fine with them. Accordingly, he asked the Manager (Administration) to seek quotations from various bus operators who normally gave bus on lease. There were only two tour operators, namely, M/S J.N. Travels owned by Mr Haridas and M/S Sumukh Tours and Travels owned by Mr Girish who gave their quotations. Both the tour operators gave their options to operate in the evening. They were willing to start from the campus at 6.15 p.m. and return back with the passengers at 8.45 p.m. During the conversation Mr Rao asked both Mr Girish and Mr Haridas on the type of the bus that they were going to give TAPMI on lease. Both of them had buses with different seating capacities to offer. Mr Haridas had a 20-seater Tata 407 minibus and a 14-seater tempo traveller. Depending upon the seating capacities and on the number of trips per week the pricing by both the travel agencies varied. In addition to this, both operators wanted revision of lease rates with an upward revision in diesel prices (Exhibit 5). Mr Haridas mentioned that if the 20-seater Tata 407 operated daily then he would charge INR 1,100 per day and if it operated four days per week, then the charge would go up to INR 1,300 per day. For the tempo traveller the same price differentiation existed. If it operated daily, then it was INR 900 per day and for four days in a week, it was INR1100 per day. Haridas was also willing to provide a new vehicle if the contract agreement was for two to three years. Girish on the other hand, had only one type of vehicle to offer, i.e. a 22-seater Tata 407-Maxi Cab and the price he quoted was INR 1,200 per day irrespective of the number of trips per week.
Prof Rao thanked both his managers for their efforts. But he was not sure which options to choose from the three to solve the problem of transportation. Each one of the options had its own merits and demerits.

Exhibit 2. Daily wages of driver, conductor and cleaner (in INR):
1. In year 2008: Driver Salary = 350, Conductor Salary = 250, Cleaner Salary = 150
2. In year 2009: Driver Salary = 350, Conductor Salary = 250, Cleaner Salary = 150
3. In year 2010: Driver Salary = 450, Conductor Salary = 350, Cleaner Salary = 200
4. In year 2011: Driver Salary = 450, Conductor Salary = 350, Cleaner Salary = 200
5. In year 2012: Driver Salary = 700, Conductor Salary = 500, Cleaner Salary = 250
Source: Data collected from the existing bus operators

Exhibit 3. Running cost for private bus operators:
1. Mileage of the bus = 4 km/L
2. Road tax per seat per quarter = INR 750
3. Insurance actual amount per annum = INR 33,680
4. Battery (replacement every two years) = INR 24000
5. Tyres (replacement every 85,000 km) = INR 1,36,000
6. Other maintenance expenditure like Manufacturers’ warranty is valid for the first 1,50,000 km or the first 18 months since the date of purchase. After completion of 18 months, up to next 1,50,000 km, the maintenance cost is INR 0.90 per km. After 1,50,000 kilometres the maintenance cost is INR 1.50 per km up to 10 years.
Source: Data collected from the existing bus operators

Exhibit 4. Running cost of vehicle for educational institution:
1. Mileage of the bus = 4 km/L
2. Driver salary INR 7,000 in 2008 = 10% growth yearly
3. Cleaner salary INR 4,000 in 2008 = 10% growth yearly
4. Insurance amount = INR 30,000 per annum
5. Battery (replacement every two years) = INR 24,000
6. Tyres (replacement every 85,000 km) = INR 1,36,000
7. Other maintenance expenditure = Refer Exhibit 3
8. Road tax = INR 3,696 per annum for first five years and after that, there will be an increase of 30% for every five years.
Source: Data collected from the existing bus operators

Exhibit 5. Diesel prices for the past five years (in INR):
1. Year 2008:
February = 31.76
May = 31.8
June = 34.8
July = 34.86
December = 32.86
2. Year 2009:
January = 30.86
July = 32.87
3. Year 2010:
November = 42.34
4. Year 2011:
June = 46.06
July = 46.21
5. Year 2012:
July = 44.98
August = 45.11
September = 51.24
October = 51.41
Source: Mypetrolprices.com retrieved on 28 April 2013

NOW BASED ON THE ABOVE INFORMATION, SOLVE THE THE QUESTION:
1. Which option is best among the three options (show the calculations/calculate everything that is necessary)? While answering keep the following things in mind:
a) covert to NPV for all options excluding the initial budgeting cost.
b) to convert into NPV, if ANPV is needed to calculate then use it. For example, it might be helpful for option 2 to do ANPV first and then NPV
c) As mentioned in the case, the distance of the nearby biggest city Udupi from the TAPMI campus was about 10 km. There is 2 trips thus it will be 10 * 2 = 20 km. Use this 20 km for Exhibit 3.
d) Exhibit 3 includes partial costs.
e) in option 3, the maintenance cost is bore by the travel agency.
f) show detailed calculation and give notes and interpretation of how the calculation was done.
g) consider the same time frame for each option. for example, in option 1 it is written the duration for the project is 5 years. then consider 5 years time duration for option 2 and 3 as well.