R Ltd. wants to reduce the dependency of manual workforce in the operation of its factory by adopting automatic machine. It has two options under…

Evaluation of Alternatives Working Notes: Depreciation on Machine M = (4,50,000 - 45,000) 5 = 81,000 Depreciation on Machine N = (3,50,000 - 35,000) 7 = 45,000 (i) NPV and PI for each machine Particulars Machine M (₹) Machine N (₹) Annual Savings: Direct Wages 11,00,000 12,00,000 Scraps 1,00,000 1,20,000 Total Savings (A) 12,00,000 13,20,000 Annual Running Cost (B) 9,00,000 11,00,000 Annual Cash Savings (A-B) 3,00,000 2,20,000 Less: Depreciation 81,000 45,000 Annual Savings before Tax 2,19,000 1,75,000 Less: Tax @ 25% 54,750 43,750 Annual Savings /Profits after tax 1,64,250 1,31,250 Add: Depreciation 81,000 45,000 Annual Cash Inflows 2,45,250 1,76,250 PVIFA 3.889 5.032 PV of Annual Cash Inflows 9,53,777.25 8,87,890 PV of Salvage Value 45,000 x 0.650 35,000 x 0.547 = 29,250 = 19,145 Total PV of Inflows 9,83,027.25 9,06,035 NPV 9,83,027.25 - 4,50,000 9,06,035 - 3,50,000 = 5,33,027.25 = 5,56,035 PV Index = Present Value of Cash Inflow Investment 9,83,027.25 4,50,000 = 2.18 9,06,035 3,50,000 = 2.59 (ii) Equivalent Annualized NPV Machine M = 5,33,027.25 3.889 = 1,37,060/- Machine N = 5,56,035 5.032 = 1,10,500/- So machine M should be selected on the basis of Equivalent Annualized Criterion.