Illustration 14 : A large profit making company is considering the installation of a machine to process the waste produced by one of its existing manufacturing process to be converted into a marketable product. At present, the waste is removed by a contractor for disposal on payment by the company of Rs. 50 lakhs per annum for the next four years. The contract can be terminated upon installation of the aforesaid machine on payment of compensation of Rs. 30 lakhs before the processing operation starts. This compensation is not allowed for deduction of tax purposes. 52 The machine required for carrying out the processing will cost Rs. 200 lakhs to be financed by a loan repayable in 4 equal installments commencing from the end of year 1. The interest rate is 16% per annum. At the end of the 4th year, the machine can be sold for Rs. 20 lakhs and the cost of dismantling and removal will be Rs. 15 lakhs. Year 1 2 3 4 Sales 322 322 418 418 30 40 85 85 75 75 85 100 40 45 54 Material consumption Wages Other expenses Factory overheads Depreciation (as per income-tax rules) 70 1 55 60 110 145 50 38 28 21 Initial stock of materials required before commencement of the processing operations is Rs. 20 lakhs at the start of year 1. The stock levels of materials to be maintained at the end of year 1, 2 and 3 will be Rs. 55 lakhs and the stocks at the end of year 4 will be nil. The store of materials will utilise space which would otherwise have been rented out for Rs. 10 lakhs per annum. Labour costs include wages of 40 workers, whose transfer to this process will reduce idle time payments of Rs. 15 lakhs in year 1 and Rs. 10 lakhs in year 2. Factory overheads include apportionment of general factory overheads except to the extent of insurance charges of Rs. 30 lakhs per annum payable on this venture. The company's tax rate is 50%. Present value factors for four years are as under