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RST Enterprises is evaluating three machines for purchase to meet increasing production demands. The following...

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Question

Accounting

RST Enterprises is evaluating three machines for purchase to meet increasing production demands. The following details are available. Assume all sales are on cash. The corporate income-tax rate is 32%. Interest on capital may be assumed to be 12%.

Particulars

Machine J(Rs)

Machine K(Rs)

Machine L(Rs)

Initial investment

3,50,000

3,80,000

4,00,000

Estimated annual sales

5,00,000

5,50,000

6,00,000

Cost of production:




Direct material

60,000

65,000

70,000

Direct labour

50,000

55,000

60,000

Factory overhead

70,000

75,000

80,000

Administration cost

15,000

18,000

20,000

Selling & Distribution cost

10,000

12,000

15,000

The economic life of Machine J is 4 years, Machine K is 3 years, and Machine L is 5 years. The scrap values are Rs.20,000, Rs.25,000, and Rs.30,000 respectively. Determine the most profitable investment based on the payback period method.

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