Production engineers of a manufacturing firm have proposed a new equipment to increase productivity of a manual gas-cutting operation. The initial investment (first cost) is ₹5,00,000 and the equipment will have a salvage value of ₹1,00,000 at the end of its expected life of 5 years. Increased

Question

Production engineers of a manufacturing firm have proposed a new equipment to increase productivity of a manual gas-cutting operation. The initial investment (first cost) is ₹5,00,000 and the equipment will have a salvage value of ₹1,00,000 at the end of its expected life of 5 years. Increased productivity will yield an annual revenue of ₹2,00,000 per year. If the firm’s minimum attractive rate of return is [latex]15\%[/latex], is the procurement of the new equipment economically justified?
Use P.W. method.

Accepted Answer

Step 1: The cash flow diagram for this problem is shown in Fig. 5.1.

Step 2: The P.W. of the series of cash receipts is computed as:

[latex]P.W.=₹2,00,000\left(P/A,15\% ,5\right)+₹1,00,000\left(P/F,15\% ,5\right)[/latex]

[latex]=₹2,00,000\left(3.3522\right)+₹1,00,000\left(0.4972\right)[/latex]

[latex]P.W.=₹7,20,160[/latex]

Step 3: The P.W. of the series of cash disbursements is computed as:

[latex]P.W.=₹5,00,000[/latex]

Step 4: [latex]N.P.W.=₹7,20,160-₹5,00,000[/latex]

[latex]N.P.W.=₹2,20,160[/latex]

Since [latex]N.P.W. \gt 0[/latex], the purchase of this equipment is economically justified.

Question 5.1: Production engineers of a manufacturing firm have proposed a...

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