CASE STUDY

The continental construction limited has recently got a contract for construction of National Highway-8 near Gurgaon. The continental would require vehicles to be used by its engineers for inspection of the sites. One option before the continental is to hire the inspection vehicle from Convenient Tours and Travels limited. Hiring charges would be Rs.900 per day for 80 km/EIGHT HOURS and Rs. 7/km beyond 80 km. The overtime rate for drivers would be Rs.25/hour beyond 8 hours. It is estimated that , on an average, the inspection vehicle would be requiring for 10 hours/day and 100 km/day. The hiring charges would be increased by 10 percent every year. The chief engineer, Himanshu Pandey, has submitted an alternative proposal to CEO, Neeraj Bodra to buy a Mahindra Bolero costing Rs. 7 lakh; Mahindra and Mahindra has an arrangement to buy back its vehicles after 5 years for Rs. 200000. The associated operating cost are estimated as follows: Drivers salary, Rs.8000 per month; annual increment 3 per cent Drivers overtime beyond 8 hours, Rs.30/hour Insurance of the vehicle, 1 percent of the depreciated value. Annual maintenance cost, years 3-5 Rs.15000 Fuel charges: year 1-2 Rs.3/km; year 3, Rs.3.5/km; and years 4-5, Rs 4/km 6. Annual depreciation 20 %(Rs.100000) 1. 2. 3. 4. 5.

Required: The CEO seeks the opinion of the CFO, Vishnu Rawat, on the two alternative proposals for the required inspection vehicle. What advice should Rawat give? Why? Assume 35% tax and 15% required rate of return for the continental.