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

This question wants a payback period for Shekhar's Rs. 30 lac investment, assuming Bistupur sells like Patna. Instead of picking a year figure straight away, it helps to actually run the numbers from the case and see where they land.

1. Less than five years: even at the best-case Patna numbers (Rs. 2 lacs revenue, 30% margin, so Rs. 0.6 lacs total monthly profit, and Shekhar's 70% share is Rs. 0.42 lacs a month, or about Rs. 5.04 lacs a year), payback works out to about 5.95 years, which is already past five years, so this is too optimistic.
2. Less than seven years: this matches only the best-case scenario, about 5.95 years; the worst case from the same Patna range runs to about 14.3 years, so "less than seven" only holds if Bistupur performs at the very top of the range.
3. Less than eight years: again true only near the best-case end of the range, not across the range Patna actually gives us.
4. May be never: the worst-case Patna scenario (Rs. 1 lac revenue, 25% margin, giving Shekhar about Rs. 2.1 lacs a year) needs roughly 14.3 years just on sales and margin alone, before adding Bistupur's much higher rent (Rs. 30 to 40 per square foot versus Rs. 15 to 20 elsewhere in the city), which is not included in the Patna benchmark and would cut further into the real profit.

Since the computed payback swings from about six years to well past fourteen depending on which end of Patna's own range applies, and Bistupur's extra rent burden would stretch it even further, no fixed year figure can be trusted. The safest, most honest reading is that recovery may never happen on a reliable basis.

Let's summarize:

• A range of inputs (revenue, margin) produces a range of paybacks, not one clean number.
• Ignoring location-specific costs like Bistupur's higher rent understates the true payback period.

So "may be never" is the answer that best respects this uncertainty.