njd

Illustration 10: XYZ Ltd. is manufacturer of high quality running shoes. Devang. President is considering computerizing the company's ordering, inventory and billing procedures. He estimates that the annual savings from computerization include a reduction of 10 clerical employees with annual salaries of Rs. 15,000 each, Rs. 8,000 from reduced production delays caused by raw materials inventory problems, Rs. 12,000 from lost sales due to inventory stock outs and Rs. 3,000 associated with timely billing procedures. The purchase price of the system is Rs. 2,00,000 and installation costs are Rs. 50,000. These outlays will be capitalized (depreciated) on a straight line basis to a zero book salvage value which is also its market value the end of five years. Operation of the new system requires two computer specialists with annual 38 alaries of Rs. 40,000 per person. Also rate 40% and rate of return (cost of capital) for this project is 12%. Maintenance & Operating expenses is Rs. 12,000 p.a. You are required to: (1) Find the project's initial net cash outlay. (ii) Find the project's operating and terminal value cash flows over its 5 year life. (iii) Evaluate the project using NPV method. (iv) Evaluate the project using Pl method. (v) Calculate the project's payback period. (vi) Find the project's cash flows and NPV (part (1) through (iii) assuming that the system can be sold for Rs. 25,000 at the end of five years even though the book salvage value will be zero, and (vii) Find the project's cash flows and NPV (part (i) though (ii)] assuming that the book salvage value for depreciation purposes is Rs. 20,000 even though the machine is worthless in terms of its resale value. Note : (a) Present Value of annuity of Re. 1 at 12% rate of discount for 5 years is 3.605. (b) Present Value of Re. 1 at 12% rate of discount, received at the end of 5 years is 0.567