ABC Ltd manufactures toys and other short lived fad items. The research and development department has come up with an item that would make a good promotional gift for office equipment dealers. As a result of efforts by the sales personnel, the firm has commitments for this product.

To produce the quantity demanded, ABC Ltd will need to buy additional machinery and rent additional space. The equipment will be purchased for Rs.900, 000. It will require RS. 30,000 in modifications, RS. 60,000 for installation and RS. 90,000 for testing. The equipment will have a salvage value of about Rs.180, 000 at the end of the third year. Equipment is expected to be sold at the end of project at salvage value. Working capital will increase by RS. 100,000 at the start of project and will be recovered by full amount at the end of project. No additional expenses are expected to be incurred.

The estimates of revenues and costs for this product for the three years have been developed as follows: