SITUATION The management of Indian Commercial Bank was contemplating to buy a new IBM computer which could be used

to replace the posting, monthly statement, payroll and interest departments now operating in the Bank. The installation of Computer would result in drastic reduction in payroll in these departments. The computer would cost Rs. 27,00,000. Besides, the Bank will have to incur additional cost of Rs. 1,50,000 for installation, Rs. 75,000 for power lines and electrical work and Rs. 75,000 for transportation. The computer is expected to have a 5-year useful life with a salvage value of Rs. 2,27,000. Depreciation is to be by the straight-line method. The equipment that would be replaced by the computer has been fully depreciated and the management feels that it could be sold in the present favorable market for Rs. 1,50,000 net. The Bank executives estimate that the computer should save Rs. 9,75,000 a year before depreciation and taxes, but they realize this will be subject to the amount of business which the Bank handles. A meeting of the Banks executives was convened to make estimates emerged from the deliberations.
Savings from Computer (Rs.) Probability %age

12,00,000 14,00,000 11,00,000 09,00,000 07,00,000

10 40 30 15 05

The Bank had only common stock standing. The liability side of the Banks Balance Sheet was as follows : Per Cent Demand Deposits 60 Time Deposits 30 Capital Stocks and Reserves Surplus 10 The Bank followed the usual pattern of charging for checking accounts; however, even so it found that there is an additional expense to the Bank of 1 %. The savings accounts earned on an average a 4 % return. The Banks earnings per share last year was 3 /-, with a payout of 50 %. The growth of earnings per share and dividend has been 7 % per year for the last five years. The present market price of the stock is Rs. 45 and not been subject to much fluctuation. Required : Should the Bank purchase this machine ?