75,50,000 30,50,200 2.84.48.500 Net present Value = P.V. of Cash Inflow - P.V. Investment = Rs. 2, 84, 48,500 - 1, 42, 97,000 = Rs. 1, 41, 51,500 Recommendation : Net present value (NPV) is positive (+), So the project should be accepted. Illustration 22: Nine Gems Ltd. has just installed Machine R at a cost of Rs. 2, 00,000. The machine has a five year life with no residual value. The annual volume of production is estimated at 1, 50,000 units which can be sold at Rs. 6 per unit. Annual operating costs are estimated at Rs. 2, 00,000 (excluding depreciation) at this output level. Fixed costs are estimated at Rs. 3 per unit for the same level of production 60 Nine Gems Ltd. has just come across another model called Machine - S capable of giving the same output at an annual perating cost f RS 1, 80,000 (excluding depreciation). There will be no change in fixed costs. Capital cost of this machine is Rs. 2, 50,000 and the estimated life is five year with nil residual value. The company has an offer for sale of machine: Rat Rs. 1,00,000. But the cost of dismantling and removal will amount Rs. 30,000. As the company has not yet commenced operations, it wants to sell Machine -R and purchase machine -S. Nine Gems Ltd. will be a zero-tax company for seven years in view of several incentives and allowances available. The cost of capital may be assumed at 14% P.V. factors for five years are as follows: Year 1 2 3 4 5 P.V. Factors 0.877 0.675 0.675 592 0.519 Advise whether the company should opt for the replacement