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The Mayfair Rubber Industry Ltd. (MRIL) manufactures small rubber components for the local market. It is presently using 8 machines which were acquired 3 years

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The Mayfair Rubber Industry Ltd. (MRIL) manufactures small rubber components for the local market. It is presently using 8 machines which were acquired 3 years ago at a cost of Rs. 18 lakh each having a useful life of 8 years with no salvage value. The policy of the company is to depreciate all machines in 5 years. Their production capacity is 37 lakh units while the annual demand is 30 lakh units. The MRIL has received an order from a leading automobile company of Singapore for the supply of 20 lakh units at Rs.15 per unit. The existing machines can be sold @Rs.12 lakh per machine. It is estimated that the removal cost of each machine would be Rs. 60,000 . In order to meet the increased demand, the MRIL can acquire 3 new machines at an estimated cost of Rs.100 lakh each which will have a combined production capacity of 52 lakh units. The operating parameters of the existing machines are as follows: (i) Labour requirements (Unskilled-18; Skilled-18; Supervisor-3; and Maintenance-2) and their per month salaries are Rs.3, 500; Rs.5, 500; Rs.6, 500 and Rs.5, 000 each respectively with an increase of 10 percent to adjust inflation. (ii) Raw materials cost, inclusive of wastage is 60 per cent of revenues. (iii) Maintenance cost - years 1-5 (Rs.22.5 lakh), and years 6-8 (Rs.67.5 lakh). (iv) Operating expenses - Rs.52.10 lakh expected to increase annually by 5 percent. (v) Insurance cost/premium - 1.79 per cent of the Purchase cost of machine in the first year and discounted by 10 percent in subsequent years. (vi) Selling Price - Rs.15 per unit. The projected operating parameters with the replacement by the new machines are as follows: (i) Additional working capital - Rs. 50 lakh. (ii) Savings in cost of utilities - Rs.2.5 lakh p.a. (iii) Maintenance cost - years 1-2 (Rs.7.5 lakh); years 3-5 (Rs.37.5 lakh). (iv) Raw materials cost -55 per cent of sales. (v) Employee requirement (6 skilled at monthly salary of Rs.7, 000 each and one for maintenance at monthly salary of Rs.6, 500). (vi) Laying off cost of 34 workers - (Unskilled-18; Skilled-12; Supervisors-3; and maintenance-1) Rs.9,21,000, that is equivalent to six month' (vii) Insurance cost/premium-2 per cent of the Purchase cost of machine in the first year and discounted by 10 percent in subsequent years. (viii) Life of machines -5 years and salvage value - Rs. 10 lakh per machine. The company follows straight line method of depreciation and the same is accepted for tax purposes. Corporate tax rate is 35 per cent and the cost of capital is 20 percent. As the Finance Manager of MRIL, prepare a report for submission to the top management with your recommendations about the financial viability of the replacement of the existing machine

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