26-06-2012, 05:19 PM
Indo Metal Works (IMW) Ltd.
![Microsoft Word 2007 Document .docx](https://seminarproject.net/images/attachtypes/doc.gif)
Case Study:
The Indo metal works (IMW) Ltd. Manufactures products such as cooler shelving, stocking carts and bakery racks. Most of its products are directly sold to shops, super markets and hotels.
The IMW is currently using a manual system which was purchased 2 years ago for Rs. 20 crore and has a remaining useful life of 6 years and zero salvage value. In order to gain competitive advantage by adopting new technology for higher level of profitability with improved quality of products and productivity, the managing director of IMV has under consideration the replacement of the manual system with a robotics manufacturing system. It would require an initial investment of Rs. 56 crore as purchase and Rs. 7 crore as installation cost. To work out the cost-benefit analysis of the proposal, he assigns the task to a committee consisting of the controller, the marketing director and the production director.
The AIDE 900 robotic system has the capability to weld stainless steel and aluminium used by the IMW as raw materials and can be programmed to adjust the path, angle and speed of the torch. The production director is excited as the system would eliminate the need to hire welders who are so expensive and the market for welders seems perpetually tight.
Since the robotics welding is likely to provide better quality products and product scheduling and avoid late deliveries, the marketing director is convinced that the annual sales would increase by 40 per cent compared to the existing manual system of equipment. It is also anticipated that there would be reduction to the extent of 25 per cent in variables cost and 10 per cent in fixed costs (excluding depreciation).
The existing manual system can be sold for Rs. 3 crore. Due to replacement, the management estimates the working capital requirement of Rs. 7 crore.
Assuming 12 per cent cost of capital and 35 per cent tax, prepare a financial analysis report for the committee of directors of IMW to be submitted to the managing director. What recommendation would you make? The IMW uses written down value method of depreciation. The new system like the existing manual system will be subject to 25 per cent depreciation. It is expected to have useful economic life of six years with Rs. 5 crore as salvage value. The company has several other plants in the asset block of 25 per cent depreciation.