Analysis: Since the NPV of Cash flows of proposal to install a machine to process the waste into marketable product is positive, the proposal can be accepted. Assumptions: The following assumptions were considered while computation of NPV of the proposal: - Material stock increase will lead to cash outflow. - idle-time wages are also taken into consideration while calculation of wages. - Insurance charges are only taken as relevant for Computation of cashflow - Interest is calculated at 16% p.a. based on diminishing balance. The repayment of loan is in 4 equal installments. - Capital gains tax ignored on profit on sale of machinery. - Saving in contract payment and income-tax thereon considered in computation of cash flows. 53 Illustration 15: A company produces main product 'Super' and a co-product "Mild'. The main product is sold entirely to its collaborator, but the product Mild' is sold at the local market. The company increased its capacity as a reslut of which the output of 'Mild' increased to 15,000 m/t per annum at a price Rs. 1,000 per m.t. However, in the face of increased competition to sell the entire output of 15,000 m/t of 'Mild the company will have to reduce the sale price by Rs. 50 per m.t. every year for next 5 years and hereafter the price will stabilize at Rs. 750 per m.t. As an alternative, the company can convert 'Mild' into 'Medium' at a variable cost of Rs. 200 per (metric) tonne. However to enter the market the sale price will have to be Rs. 1,200 per m.t. in the first year and Rs. 1,300 per m.t. in the second year and so on. The sale of Medium will be 1,000 m/t in the first year and there upon going up by 1,000 m/ t each year. The company will have to invest Rs. 30 lakhs in capital outlay to produce Medium'. You are required to present the projected sales volume (quantity and value) of products 'Mild' and 'Medium' and also appraise the investment of Rs. 30 lakhs at 12% per annum for the period of next 5 years. Present value of Rupee one at 12% p.a. Year Discounted factor 1 0.89 2 0.79 3 0.71 4 0.64 5 0.57