Delta Manufacturing Inc is considering purchasing a new machine to meet increasing demand. The relevant...
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Delta Manufacturing Inc is considering purchasing a new machine to meet increasing demand. The relevant details of three machines are provided below. Assume all sales are cash transactions. Corporate income-tax rate is 31%. Interest on capital may be assumed to be 8%.
Particulars | Machine X1 (?) | Machine Y1 (?) | Machine Z1 (?) |
Initial investment | 30,00,000 | 34,00,000 | 32,00,000 |
Estimated annual sales | 6,00,000 | 5,50,000 | 6,50,000 |
Cost of production: | |||
Direct material | 55,000 | 50,000 | 65,000 |
Direct labour | 45,000 | 40,000 | 55,000 |
Factory overhead | 70,000 | 65,000 | 80,000 |
Administration cost | 25,000 | 20,000 | 30,000 |
Selling & Distribution cost | 15,000 | 12,000 | 18,000 |
The economic life of Machine X1 is 3 years while it is 4 years for the other two. The scrap values are ?50,000, ?40,000, and ?45,000 respectively. You are required to identify the most profitable investment based on the payback period method.
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