Reference no: EM133382444

Case Study: The Iridium Jewellery Company produces and sells Jewellery in its showrooms. Iridium's Jewellery is always in demand due to fine workmanship, reasonable prices and helpful and polite behaviour of its sales persons. Iridium has recently entered in an arrangement with the Sale Well Gems (from England) for distribution of its products in the United Kingdom. Iridium expects yearly additional revenue to the tune of Rs 75 lakh from its sales to Sale Well Gems. To meet the increased demand, it would have to replace its existing machine. The book value of the machine being currently used is Rs. 30 lakh with remaining usefulness of 6 years and salvage value of Rs. 6 lakh. It can be sold for Rs. 15 lakh The choice of the machinery is between an imported Finesse machine from Amsterdam and a Work Horse machine available locally. The cost of Finesse is Rs. 50 lakh. The freight and insurance costs associated with its import would amount to 40 per cent of the cost of the machine. The expected salvage value at the end of its 5-year life is Rs. 15 lakh. The enlarged operation would require Rs. 10 lakh as additional working capital Iridium's cost of the capital may be assumed to be 15 per cent Work Horse locally available would cost Rs. 35 lakh with no salvage value after 7 years of its useful life. The additional working capital requirement would be Rs 5 lakh. The required rate of return for the 7-year period would be 16 per cent. Finesse machine is technologically advanced and automated Work Horse would require supervision for usage and would cost Rs. 3 lakh in training. The operation of the new machiners) would involve additional fixed costs and variable costs among to Rs. 2 lakh and Rs. 8 lakh respectively The CEO of Iridium,Akhil Rana, seeks your advice, as a financial consultant, on the course of action.

Question: Would you advise him to import Finesse or acquire Work Horse? You may assume 35 per cent har; straight line method of depreciation for tax purposes, and the existing machine constinutes a separte block for depreciation purposes. Also assume that the firm would have suflicient short-term capital gains in year 5.