Illustration 17: ABC Company Ltd. has been producing a chemical product by using Machine Z for the last two years. Now the management of the company is thinking to replace this Machine either by X or by Y Machine. The following details are furnished to you: Machine Book Value Resale Value Now Purchase Price Annual Fixed Cost (including Depreciation) Variable Running Costs (Including Labour) per Unit Production Per Hour (Rs.) z X 1,00,000 1,10,000 1,80,000 2,00,000 92,000 1,08,000 1,32,000 3 1.50 2.50 8 8 12 You are also provided with the following details: Selling price per unit Rs. 20 Cost of materials per unit Rs. 10 55 Annual operating hours 2,000 Working life of each of the three machines (as from now) 5 years Salvage value of Machines Z - Rs. 10,000; X - Rs. 15,000; Y. Rs. 18,000. The company charges depreciation using straight line method. It is anticipated that an additional cost of Rs. 8,000 per annum would be incurred on special advertising to sell the extra output of Machine Y. Assume tax rate of 50% and cost of capital 10%. The present value of Re. 1 to be received at the end of the year at 10% is as under. Year Present Value 1 .909 2 826 3 751 4 .683 5 .621 Using NPV Method, you are required to analysis the feasibility of the proposal and make recommendations