A firm did a market survey one year back to find out about the
demand of a new product. The cost of the survey was 1 lakh. It is
now evaluating the new product line as a project with the following info: The investment outlay is 100 million. This consists of 80 million on plant and machinery and 20 on net working capital. The entire outlay will be incurred at the beginning of project The project will be financed with 45 million equity, 5 million preference (15%) and 50 million debt (15%) capital The life of the project is expected to be 5 years. At the end of 5 years, fixed assets will fetch a salvage value of 30 million whereas net working capital will be liquidated at its book value The project is expected to increase revenues to 240, from 120 million per year and costs to 160, from 80 million. Costs include all costs except depreciation, interest and tax (30%) Plant will depreciated @25% per year as per WDV method A small courier company is in need of a small vehicle to make deliveries. It is intending to choose between two options. One option is to buy a new three wheeler that would cost Rs 75000 and serve for 8 years. The other alternative is to buy a second-hand vehicle for Rs 45000 now that could serve the firm for 4 years. Therefore the firm can buy another second-hand vehicle for Rs 40000 that lasts for another 4 years. The firm can realize the WDV of the vehicles whenever they are discarded. The firm pays 30% tax and is allowed to claim depreciation on vehicles of 25% on WDV basis. If the cost of capital for the firm is 12% which of the option the firm should adopt?