MUENCHEN INTERNATIONAL BUSINESS SCHOOL

“ CASES IN FINANCE “

Submitted To- Submitted By-

Prof. Vaishali apte Prince Asati
Roll no. 32
Case

AB Services is in the business of providing home services like

plumbing, sewerage line cleaning etc. There is a proposal before the
company to purchase a mechanized sewerage cleaning line for a sum
of Rs. 20 lakhs. The life of the machine is 10 years.
The present system of the company is to use manual labour for the
job. You are provided the following information -

Cost of Machine Rs.20 Lacs

Depreciation 20% p.a. Straight line method
Operating cost Rs.5 Lacs p.a.
Present system
- Manual Labour 200 persons
-Cost of Manual Labour Rs.10,000 per person p.a.

The Company has an after tax cost of funds of 10% per annum. The
applicable rate of tax inclusive of Surcharge and Cess is 35%.
Present System

Cash outflows in case of Manual Labour system

 Annual labour required – 200 persons
 Cost of Manual Labour --Rs.10,000 per person p.a.
Total cost per annum-200*10000
=20,00,000
For 10 years total cost would be
10*20,00,000= 2,00,00,000
 Present value of future outflows of 10 years
2000000*6.14
= 1,22,80,000

Machine system

In case the company purchases the machinery its cash outflows are :

Cost of machinery - 20,00,000

Operating cost - 5,00,000 p.a
Present value of future outflows is
= 5,00,000*6.14
= 30,70,000
Present value of total cash outflows in case of purchasing machinery

= 30,70,000+20,00,000= 50,70,000
Present value of non- cash inflows :
= 4,47,161
Net outflows = 50,70,000-4,47,161 = 46,22,839
 Working Notes:

Statement showing depreciated value of machine for 10 years

Machine Value @ Depreciation @ 20% during Machine Value @ end of
Years
beginning of year the year year
1 2000000 400000 1600000
2 1600000 320000 1280000
3 1280000 256000 1024000
4 1024000 204800 819200
5 819200 163840 655360
6 655360 131072 524288
7 524288 104858 419430
8 419430 83886 335544
9 335544 67109 268435
10 268435 53687 214748
 Present value of non-cash inflows
Discount
Tax deductible on Discounted non-
Depreciation @ 20% factor
depreciation @35% cash flow
@10%
400000.00 140000 0.91 127273
320000.00 112000 0.826 92512
256000.00 89600 0.751 67290
204800.00 71680 0.683 48957
163840.00 57344 0.62 35553
131072.00 45875 0.564 25874
104857.60 36700 0.513 18827
83886.08 29360 0.466 13682
67108.86 23488 0.424 9959
53687.09 18790 0.385 7234
447161
Que 1 State whether it is advisable to purchase the machine.

Ans: It is advisable to purchase the machine since the cost of acquiring

and maintaing of machine is less than the present system of Manual
labour
i.e- Machine cost
Cost of machinery - 20,00,000
Operating cost - 5,00,000 p.a
Present value of future outflows is

= 5,00,000*6.14
= 30,70,000
Present value of total cash outflows in case of purchasing machinery
= 30,70,000+20,00,000= 50,70,000
Present value of non- cash inflows :
= 4,47,161

Net outflows = 50,70,000-4,47,161 = 46,22,839

Present system of manual labour cost is 1,22,80,000

Which is more than cost of purchasing machinery
Que 2

Compute the savings / additional cost as applicable, if the machine is

purchased.

 If machine is purchased then it will result in saving of 76,57,161

 Present system of manual labour cost is 1,22,80,000

 Cost of acquiring machinery is 46,22,839

Its results in saving of 76,57,161 (1,22,80,000-46,22,839)

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