Question

Lotus Corporation is contemplating replacement of its existing milling machine with an improved version that would increase the production from 1200 components per month to 1800. Due to improved design the new component would also fetch a better price of Rs 90 per piece as against existing price of Rs 85 per piece. New machine costs Rs 12 lacs with additional amount on installation and training of Rs 1.50 lacs to be spent. If purchased, the existing milling machine would be sold for Rs 3.5 lacs that has a book value of Rs 4 lacs. The annual depreciation on the existing machine is Rs. 50,000. The remaining life of the existing machine is 5 years and the firm follows a policy of SLM for depreciation of fixed assets. The life of the new machine too is 5 years. Installation of new machine would entail some extra recurring cost. The operator salary would be increased from Rs 50,000 to Rs 70,000 per month. However it would save the cost on maintenance and power. While the production would increase by 50% the rise in maintenance cost would be 20% from existing Rs 10,000 per month. Similarly, the power consumption would increase by 25% only from existing Rs 8,000 per month. There would be no change in any other cost. Increase in working capital may be ignored. Assuming 20% taxes and cost of capital at 15%. Assume the salvage value of the new machine to be zero after 5 years. Examine -
Whether Lotus Corporation should buy the new milling machine or not?

2. Lotus Corporation has adequate reserves & surplus in its Balance sheet. Company is thinking to go in for corporate restructuring. Suggest any possible option for the company, considering the fact that the economic activity for the past seven months in the Country due to “COVID -19” is much below the average level. Give proper justification for your answer.

Answer 1

Answer:

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