Alpha Industries Ltd wants to upgrade its machinery to increase production. Three machines are being...
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Accounting
Alpha Industries Ltd wants to upgrade its machinery to increase production. Three machines are being considered, with details as below. Assume all sales are cash transactions. Corporate income-tax rate is 33%. Interest on capital may be assumed to be 11%.
Particulars | Machine M (?) | Machine N (?) | Machine O (?) |
Initial investment | 32,00,000 | 35,00,000 | 34,00,000 |
Estimated annual sales | 6,50,000 | 6,00,000 | 7,00,000 |
Cost of production: | |||
Direct material | 55,000 | 50,000 | 60,000 |
Direct labour | 45,000 | 40,000 | 50,000 |
Factory overhead | 75,000 | 70,000 | 85,000 |
Administration cost | 28,000 | 25,000 | 30,000 |
Selling & Distribution cost | 18,000 | 15,000 | 20,000 |
The economic life of Machine M is 3 years while it is 4 years for the other two. The scrap values are ?48,000, ?38,000, and ?43,000 respectively. You are required to determine the most profitable investment based on the payback period method.
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