cases in finance

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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

YearsMachine Value @

beginning of year

Depreciation @ 20% during

the year

Machine Value @ end of

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

mailto:value@end%20of%20year






Present value of non-cash inflows

Depreciation @ 20%

Tax deductible on

depreciation @35%

Discount

factor@10%

Discounted non-

cash flow

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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