PQR Corporation is planning to invest in new machinery to increase production capacity. Three machines...
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PQR Corporation is planning to invest in new machinery to increase production capacity. Three machines are being considered. The relevant details including estimated yearly expenditure and sales are given below. All sales are on cash basis. Corporate income-tax rate is 34%. Interest on capital may be assumed to be 9%.
Particulars | Machine A (Rs) | Machine B (Rs) | Machine C (Rs) |
Initial investment | 3,75,000 | 4,50,000 | 4,25,000 |
Estimated annual sales | 6,50,000 | 7,00,000 | 6,75,000 |
Cost of production: | |||
Direct material | 55,000 | 60,000 | 58,000 |
Direct labour | 65,000 | 70,000 | 68,000 |
Factory overhead | 75,000 | 80,000 | 78,000 |
Administration cost | 26,000 | 28,000 | 27,000 |
Selling & Distribution cost | 18,000 | 20,000 | 19,000 |
The economic life of machine A is 2 years, while it is 3 years for the other two. The scrap values are Rs. 55,000, Rs. 65,000 and Rs. 60,000 respectively. Determine the most profitable investment based on the payback period method.
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