Investment in New Plant

The decision to invest in a new plant is an important one for any company. It requires careful consideration of various factors, including the initial cost of the investment, the expected salvage value, the economic life of the plant, and the potential profits that can be generated from it. In this case, let's analyze the investment decision of D Ltd, which is contemplating an investment of Rs.90,000 in a new plant.

Initial Investment
The initial cost of the investment is Rs.90,000. This is the amount of money that D Ltd will need to spend upfront to acquire the new plant.

Salvage Value
The salvage value of the plant is estimated to be Rs.20,000 at the end of its economic life. This is the value that D Ltd expects to receive when the plant is sold or disposed of after its useful life.

Economic Life
The economic life of the plant is estimated to be five years. This is the period for which D Ltd expects the plant to be productive and generate profits.

Profit after Tax and Depreciation
To determine the profitability of the investment, we need to consider the expected profits after accounting for taxes and depreciation.

Taxes
D Ltd will need to pay taxes on the profits generated by the new plant. The tax rate is usually a percentage of the profits, and it varies depending on the applicable tax laws and regulations.

Depreciation
Depreciation is a non-cash expense that accounts for the wear and tear of the plant over its useful life. It helps in spreading the cost of the investment over the years and reduces the taxable income of the company.

Calculating Profit after Tax and Depreciation
To calculate the profit after tax and depreciation, we need to subtract the depreciation expense from the annual profits and then deduct the taxes from the remaining amount.

Conclusion
Investing in a new plant involves considering various factors such as initial cost, salvage value, economic life, and expected profits after tax and depreciation. By carefully analyzing these factors, D Ltd can make an informed decision about whether to proceed with the investment or not. It is important to consider the potential profitability and the impact on the company's financial position before making such a significant investment.