Sparrow Textiles Pvt Ltd plans to upgrade its manufacturing capabilities. Three machines are being evaluated,...
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Sparrow Textiles Pvt Ltd plans to upgrade its manufacturing capabilities. Three machines are being evaluated, and the details are as follows. Assume all sales are cash transactions. Corporate income-tax rate is 30%. Interest on capital may be assumed to be 12%.
Particulars | Machine X (?) | Machine Y (?) | Machine Z (?) |
Initial investment | 35,00,000 | 40,00,000 | 38,00,000 |
Estimated annual sales | 7,00,000 | 6,50,000 | 7,50,000 |
Cost of production: | |||
Direct material | 60,000 | 55,000 | 70,000 |
Direct labour | 50,000 | 45,000 | 60,000 |
Factory overhead | 80,000 | 75,000 | 90,000 |
Administration cost | 30,000 | 25,000 | 35,000 |
Selling & Distribution cost | 20,000 | 18,000 | 25,000 |
The economic life of Machine X is 3 years while it is 4 years for the other two. The scrap values are ?55,000, ?45,000, and ?50,000 respectively. You are required to determine the most profitable investment based on the payback period method.
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