Linty is a small-sized firm manufacturing company. Its manufacturing plant is situated in Chattisgarh. Currently, company is labour oriented due to…

Linty is a small-sized firm manufacturing company. Its manufacturing plant is situated in Chattisgarh. Currently, company is labour oriented due to which there is less production, delay in deliveries and more defects in production. The management of the company is considering the proposal to purchase a new automatic machine which will carry out some operations which are at present performed by manual labour. There are two alternative models of the machine that are available in the market. Machine TMT 1 and TMT 2. If machine is replaced, it would provide labor saving and reduce the defects as well. It is expected to have to have an economic life of 10 years for both the models. The following details are collected: Machine TMT 1 (₹) TMT 2 (₹) Cost of Machine 45,00,000 50,00,000 Estimated saving in direct wages per annum 15,00,000 20,00,000 Estimated saving in scrap per annum 5,00,000 6,00,000 Estimated additional cost of indirect material per annum 2,00,000 2,00,000 Estimated additional cost of indirect labour per annum 1,50,000 1,80,000 Estimated additional cost of repairs and maintenance per annum 4,00,000 8,00,000 Depreciation is charged using straight line method over the useful life. Company is in 35 percent tax bracket and expected rate of return may be 15 percent. Being a finance manager of the company, you are required to evaluate the alternatives by answering the followings: