You are an intern at Mascot Engineers. Your guide is aware that you have completed a course in corporate finance. He needs some help on a project report that he has to submit to the senior management. He shares the following details with you. The management is evaluating various options to increase the efficiency of the manufacturing process. Management conducted a detailed survey of the shop floor managers and collected the feedback. The survey was administered through a consultant who charged Rs. I lac for the study. The study recommended purchase of the new machine. The new machine costs Rs. 1.3 million. This machine will attract depreciation using WDV method @ 25 percent per annum. After 5 years it is expected to fetch a value equal to its book value. The company intends to dispose the machine after 5 years. In the first year of operation, the new machine is expected to increase revenues by Rs.0.4 million. Subsequently, the revenue will increase by 6% every year. The operating cost (excluding depreciation) will reduce by Rs.20.000 (constant) per year, over the next 5 years. The company expects to finance the project using combination of debt and Equity. The cost of debt (post tax) is 9.2%. Firm expects the cost of equity as 21.8%. The Debt to Equity Ratio for the firms stands at I times. Tax rate for the firm is 27%. Options [16/01, 10:04 am] Krishna Miniyar.

What is your recommendation to internship mentor? Should they go ahead and buy the new machine. Justify your recommendation

Answer rating: 100% (QA)

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