Cost of Equipment at each location (Rs. 5, 50,000 x8 locations) 44, 00,000 Economic life of Machines (5 years) Annual depreciation (44, 00,000/5) 8, 80,000 Annual transmission cost (32 hrs. transmission 8 locations * Rs. 300 per hour) 76,800 Annual cost of operation (8, 80,000+76,800) 9, 56,800 Option III : Engaging Video Conferencing Facility on Rental Basis (Rs.) Rental cost (32 hrs. *8 location * Rs. 1,500 per hr) 3, 84,000 Telephone cost (32 hrs.x8 locations Rs. 400 per hr.) 1, 02,400 Total rental cost of equipment (3, 84,000+1, 02,400) 4, 86,400 Analysis: The annual cash outflow is minimum, if video conferencing facility is engaged on rental basis. Therefore, Option III is suggested. Illustration 18: X Ltd. an existing profit-making company, is planning to introduce a new product with a projected life of 8 years. Initial equipment cost will be Rs. 120 lakhs and additional equipment costing Rs 10 lakhs will be needed at the beginning of third year. At the end of the 8 years, the original equipment will have resale value equivalent to the cost of removal, but the additional equipment would be sold for Rs. 1 lakh. Working Capital of Rs. 15 lakhs will be needed. The 100% capacity of the plant is of 4, 00,000 units per annum, but the production and sales-volume expected are as under: Year Capacity (%) 20 2 30 3-5 75 6-8 50 56 A sale price of Rs. 100 per unit with a Profit-Volume Ratio of 60% is likely to be obtained. Fixed Operating Cash Cost are likely to be Rs. 16 lakhs per annum. In addition to this the advertisement expenditure will have to be incurred as under. Year Expenditure 1 30 2 15 3-5 10 6-8 4 The company is subject to 50% tax, straight-line method of depreciation, (permissible for tax purposes also) and taking 12% as appropriate after tax cost of capital, should the project be accepted