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GHI Pharmaceuticals is considering the purchase of a new machine to enhance production. The details...

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Question

Accounting

GHI Pharmaceuticals is considering the purchase of a new machine to enhance production. The details for three machines are given below. Assume all sales are on cash. The corporate income-tax rate is 36%. Interest on capital may be assumed to be 9%.

Particulars

Machine G(Rs)

Machine H(Rs)

Machine I(Rs)

Initial investment

5,50,000

5,80,000

6,00,000

Estimated annual sales

6,50,000

6,80,000

7,00,000

Cost of production:




Direct material

70,000

75,000

80,000

Direct labour

60,000

65,000

70,000

Factory overhead

90,000

95,000

100,000

Administration cost

20,000

22,000

24,000

Selling & Distribution cost

12,000

14,000

16,000

The economic life of Machine G is 4 years, Machine H is 5 years, and Machine I is 3 years. The scrap values are Rs.30,000, Rs.25,000, and Rs.35,000 respectively. Determine the most profitable investment based on the payback period method.

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