Pawell Corporation, a sizeable diversified manufacturer of aircraft components, is trying to determine the initial investment required to replace an old machine with a new, more sophisticated model. The present machine is working correctly, but in order to upgrade it with new technology, they purchased a new machine for Rs. 5 crore and an additional Rs. 5 lakhs will be required to install it. After the depreciation, the value of the machine becomes zero, but the owner is not ready to analyse the situation. Finally, the firm has found that a buyer is willing to pay Rs. 2 crores for the present machine and the firm refused it.
(i) Find out which decision is taken by the manager and also suggest whether the decision was favourable or not.
(ii) Which values are overlooked by the entrepreneur in the above case?
Pawell Corporation, a sizeable diversified manufacturer of aircraft components, is trying to determine the initial investment required to replace an old machine with a new, more sophisticated model. The present machine is working correctly, but in order to upgrade it with new technology, they purchased a new machine for Rs. 5 crore and an additional Rs. 5 lakhs will be required to install it. After the depreciation, the value of the machine becomes zero, but the owner is not ready to analyse the situation. Finally, the firm has found that a buyer is willing to pay Rs. 2 crores for the present machine and the firm refused it.
(i) Find out which decision is taken by the manager and also suggest whether the decision was favourable or not.
(ii) Which values are overlooked by the entrepreneur in the above case?
Investment decisions are taken by the firm. The company wants to purchase new machinery which is a long-term investment decision. Thus, it is also called capital budgeting decision. These decisions are very crucial for business since they affect the earning capacity in the long-run. The size of assets, profitability and competitiveness all are affected by this decision. As it is mentioned that without analysing the positive and negative aspects, an entrepreneur wants to remove an old machine which was working efficiently. However, in order to upgrade it with the latest technology, they need considerable investment. This decision is not favourable for the company. It is a bad capital budgeting decision, which will damage the financial fortune of the business.
Following points should be kept in mind while taking such decisions:
(a) Cash flows of the project
(b) Rate of return
(c) Investment criteria involved
(ii) Values overlooked are:
(a) Proper decision-making
(b) Safety of funds
Investment decisions are taken by the firm. The company wants to purchase new machinery which is a long-term investment decision. Thus, it is also called capital budgeting decision. These decisions are very crucial for business since they affect the earning capacity in the long-run. The size of assets, profitability and competitiveness all are affected by this decision. As it is mentioned that without analysing the positive and negative aspects, an entrepreneur wants to remove an old machine which was working efficiently. However, in order to upgrade it with the latest technology, they need considerable investment. This decision is not favourable for the company. It is a bad capital budgeting decision, which will damage the financial fortune of the business.
Following points should be kept in mind while taking such decisions:
(a) Cash flows of the project
(b) Rate of return
(c) Investment criteria involved
(ii) Values overlooked are:
(a) Proper decision-making
(b) Safety of funds
