Solution
Analysis of Proposal Number 1 (Imports)
- Total cost of guns: 0.6 X 200 $ 120 million
- Freight and insurance charges (5 percent) $ 6 million
- Cash outflow
(a) Immediate payment $ 42 million
(First installment)
(b) After one year $ 42 million
(Second installment)
( c) After two years $ 42 million
(Third installment)
(d) Cost of training Rs.50 million - Calculation of present value of cash outflows:
Time Outflow in $ Conversion Total PV Present
(Million) factor of $ outflow factor at value
(in Rs.) (Millions.) 14 percent (million Rs)
Immediate 42 35 1470 1.000 1470.00
1 year 42 36 1512 0.877 1326.02
2 years 42 37 1604* 0.769 1233.48
4029.50
- Includes training costs of Rs.50 million.
Analysis of Proposal Number 2 (Manufacture)
- Barrel Factory:
Cash Outflows
(a) Immediate
i. Cost of new machinery Rs.300 million
ii. Production set-up costs Rs. 50 million
iii. Additional working capital Rs.100 million
Total Rs.450 million
(b) Years (t = 1-3)
Capacity 50 barrels per year
Fixed cost Rs.200 million
Variable cost (50 X 10) million Rs.500 million
Total Rs.700 million