Sunflame is a leading manufacturer of items used in kitchens such as gas stoves, electric chimneys, ovens and so on$.$ It has grown significantly under the CEO Angad Bedi's dynamic leadership. In line with his belief to enhance competitiveness by using research and development for launching innovative products in the market, Sunflame has recently developed a zero Maintenance Electric Chimney $($known as Nirala$)$ which is ideally suited for Indian cooking. The research and development cost of Nirala amounts to Rs$.20,000,000.$

To gauge the market prospects for Nirala, a market survey was conducted by Virat Kohli, the V$.$P$.,$ Marketing, at an estimated cost of Rs$.500,000.$ The results of the survey were very positive, showing a significant demand for Nirala. The survey report also indicated that Nirala could capture $8$ percent of the current market size of $100,000$ units of gas electric chimney. Considering the growth of satellite towns$/$cities and residential colonies, the market is expected to grow at $2$ percent annually. The VP$,$ Marketing, suggested Nirala should be to the CEO that a market penetration pricing strategy would be most suitable and priced at Rs$.5,000$ per unit in the initial year of the launch. The price could be raised in subsequent years by $5$ percent annually. The marketing and administrative costs are expected to be Rs$.400,000$ per year.

Sunflame is presently using $6$ machines acquired $3$ years ago at a cost of Rs$.1,000,000$ each, having a

life of $7$ years, with no salvage value. These machines are currently being used for manufacturing other types of chimneys. They could be sold for Rs$.200,000$ per machine with a removal cost of Rs$.30,000$ each.

The machine to manufacture Nirala is available in that market for Rs$.10,000,000$ with a useful life of $4$ years and salvage value of Rs$.1,000,000.$ It can produce other type of chimneys also.

The new machine, being state of the art technology, would improve the productivity of the workers as well reduce the unit variable cost of manufacturing to Rs$.600,$ which would increase by $5$ percent annually.

The table below summarizes the labor cost with the existing machine and the new equipment Category

Existing

Number

New Machine$/$Equipment

Skilled Labor

$20$

Monthly Salary

Number

Monthly salary

Rs$.4,000$

$15$

Rs$.4,000$

Maintenance Men

$2$

Rs$.6,000$

$1$

Rs$.6,000$

Floor Managers

$3$

Rs$.8,000$

$2$

Rs$.8,000$

The maintenance costs currently amount to Rs$.100,000$ per year $($existing machines$).$ They would total Rs$.170\mathrm{.}000,$ with the new equipment. The net working capital required to start production of Nirala would be Rs$.$

The policy of Sunflame is to pay five months' salary as compensation in case of lay$-$off of employees.

Required:

Should Sunflame launch Nirala? Assume the following: $($i$)$ Tax, $35$ percent $($ii$)$ Required rate of return, $14$ percent and $($iii$)$ Straight line depreciation for tax purposes

CategorySkilled LaborMaintenanceMenFloorManagersEXistingNumber$320$MonthlySalaryRs. $4,000$Rs$.6,000$Rs$.8,000$New Machine$/$EquipmentNumber$152$MonthlysalaryRs. $4,000$Rs$.6,000$Rs$.8,000$