ABC Corporation has decided to purchase a machine to enhance the company's production capacity to...
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ABC Corporation has decided to purchase a machine to enhance the company's production capacity to meet increasing market demand. There are three machines under consideration. The relevant details including estimated yearly expenditure and sales are given below. All sales are on cash basis. Corporate income-tax rate is 35%. Interest on capital may be assumed to be 8%.
Particulars | Machine A (Rs) | Machine B (Rs) | Machine C (Rs) |
Initial investment | 4,00,000 | 3,50,000 | 4,50,000 |
Estimated annual sales | 6,00,000 | 5,50,000 | 6,50,000 |
Cost of production: | |||
Direct material | 50,000 | 45,000 | 55,000 |
Direct labour | 60,000 | 55,000 | 65,000 |
Factory overhead | 70,000 | 60,000 | 75,000 |
Administration cost | 25,000 | 20,000 | 30,000 |
Selling & Distribution cost | 15,000 | 12,000 | 18,000 |
The economic life of machine A is 3 years, while it is 4 years for the other two. The scrap values are Rs. 50,000, Rs. 40,000 and Rs. 60,000 respectively. Find out the most profitable investment based on the payback period method.
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