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ABC Corporation has decided to purchase a machine to enhance the company's production capacity to...

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Accounting

ABC Corporation has decided to purchase a machine to enhance the company's production capacity to meet increasing market demand. There are three machines under consideration. The relevant details including estimated yearly expenditure and sales are given below. All sales are on cash basis. Corporate income-tax rate is 35%. Interest on capital may be assumed to be 8%.

Particulars

Machine A (Rs)

Machine B (Rs)

Machine C (Rs)

Initial investment

4,00,000

3,50,000

4,50,000

Estimated annual sales

6,00,000

5,50,000

6,50,000

Cost of production:




Direct material

50,000

45,000

55,000

Direct labour

60,000

55,000

65,000

Factory overhead

70,000

60,000

75,000

Administration cost

25,000

20,000

30,000

Selling & Distribution cost

15,000

12,000

18,000

The economic life of machine A is 3 years, while it is 4 years for the other two. The scrap values are Rs. 50,000, Rs. 40,000 and Rs. 60,000 respectively. Find out the most profitable investment based on the payback period method.

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