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ACME Corp has decided to purchase a machine to expand the company's production capacity. There are...

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Accounting

  • ACME Corp has decided to purchase a machine to expand the company's production capacity. There are three machines under consideration. The relevant details including estimated yearly expenditure and sales are given below. All sales are on cash. The corporate income-tax rate is 35%. Interest on capital may be assumed to be 9%.

Particulars

Machine A (?)

Machine B (?)

Machine C (?)

Initial investment

4,00,000

5,00,000

3,50,000

Estimated annual sales

6,00,000

5,50,000

4,80,000

Cost of production:




Direct material

60,000

40,000

50,000

Direct labour

70,000

50,000

40,000

Factory overhead

80,000

70,000

60,000

Administration cost

30,000

20,000

15,000

Selling & Distribution cost

20,000

15,000

10,000

  • The economic life of machine A is 2 years, while it is 3 years for the other two. The scrap values are ?50,000, ?30,000, and ?20,000 respectively. You are required to find out the most profitable investment based on the payback period method.

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