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XYZ Ltd has decided to purchase a machine to increase its production capacity. There are...

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Accounting

XYZ Ltd has decided to purchase a machine to increase its production capacity. There are three machines under consideration. The relevant details including estimated yearly expenditure and sales are given below. Assume all sales are on cash. The corporate income-tax rate is 35%. Interest on capital may be assumed to be 9%.

Particulars

Machine A(Rs)

Machine B(Rs)

Machine C(Rs)

Initial investment

2,50,000

2,75,000

3,00,000

Estimated annual sales

4,00,000

4,20,000

4,50,000

Cost of production:




Direct material

50,000

60,000

55,000

Direct labour

40,000

35,000

38,000

Factory overhead

70,000

80,000

75,000

Administration cost

15,000

12,000

14,000

Selling & Distribution cost

8,000

9,000

10,000

The economic life of Machine A is 4 years, Machine B is 5 years, and Machine C is 3 years. The scrap values are Rs.20,000, Rs.15,000, and Rs.25,000 respectively. You are required to find out the most profitable investment based on the payback period method.

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