Alpha Industries Ltd wants to upgrade its machinery to increase production. Three machines are being...
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Accounting
Alpha Industries Ltd wants to upgrade its machinery to increase production. Three machines are being considered, with details as below. Assume all sales are cash transactions. Corporate income-tax rate is 33%. Interest on capital may be assumed to be 11%.
Particulars
Machine M (?)
Machine N (?)
Machine O (?)
Initial investment
32,00,000
35,00,000
34,00,000
Estimated annual sales
6,50,000
6,00,000
7,00,000
Cost of production:
Direct material
55,000
50,000
60,000
Direct labour
45,000
40,000
50,000
Factory overhead
75,000
70,000
85,000
Administration cost
28,000
25,000
30,000
Selling & Distribution cost
18,000
15,000
20,000
The economic life of Machine M is 3 years while it is 4 years for the other two. The scrap values are ?48,000, ?38,000, and ?43,000 respectively. You are required to determine the most profitable investment based on the payback period method.
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