AB Ltd specialises in manufacturing water tanks. The management of the company has identified a niche market that would require a particular size of water tank, not currently manufactured by the company. The company is therefore thinking about producing a new type of water tank to fulfil the requirement of this niche market. A survey is carried out and the result reveals that the company would sell 1.2 million tanks every year for six years at Rs 7000 each. The company's existing facilities cannot be used to manufacture the new size tanks and new investment will have to be made. A manufacturer has offered two options to the company. 1. The first option is that the company could buy four small machines with the capacity of manufacturing 300000 tanks each at Rs 15 million each. The machine operating costs will be Rs 5350 per tank. 2. Alternatively, the company can buy a larger machine with a capacity of 1.2 million per annum for Rs 100 million. The operating cost will be Rs 4000 per tank. The required rate of return is 12 percent and the company does not pay any tax. Discussion Questions - Which Option should the company accept? Use the most suitable method of evaluation to give your recommendation and explicitly state your assumptions. - Why do you think that the method chosen by you is the most suitable method in evaluating the proposed investment? Give the computation of the alternative methods. AB Ltd specialises in manufacturing water tanks. The management of the company has identified a niche market that would require a particular size of water tank, not currently manufactured by the company. The company is therefore thinking about producing a new type of water tank to fulfil the requirement of this niche market. A survey is carried out and the result reveals that the company would sell 1.2 million tanks every year for six years at Rs 7000 each. The company's existing facilities cannot be used to manufacture the new size tanks and new investment will have to be made. A manufacturer has offered two options to the company. 1. The first option is that the company could buy four small machines with the capacity of manufacturing 300000 tanks each at Rs 15 million each. The machine operating costs will be Rs 5350 per tank. 2. Alternatively, the company can buy a larger machine with a capacity of 1.2 million per annum for Rs 100 million. The operating cost will be Rs 4000 per tank. The required rate of return is 12 percent and the company does not pay any tax. Discussion Questions - Which Option should the company accept? Use the most suitable method of evaluation to give your recommendation and explicitly state your assumptions. - Why do you think that the method chosen by you is the most suitable method in evaluating the proposed investment? Give the computation of the alternative methods