Bharat Electronics Ltd has decided to purchase a machine to enhance their production capacity. There...
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Accounting
Bharat Electronics Ltd has decided to purchase a machine to enhance their production capacity. There are three machines under consideration. The relevant details are given below. Assume all sales are on cash basis. Corporate income-tax rate is 35%. Interest on capital may be assumed to be 8%.
Particulars
Machine A (?)
Machine B (?)
Machine C (?)
Initial investment
25,00,000
30,00,000
28,00,000
Estimated annual sales
6,00,000
5,50,000
6,50,000
Cost of production:
Direct material
50,000
45,000
60,000
Direct labour
40,000
35,000
50,000
Factory overhead
70,000
65,000
80,000
Administration cost
25,000
20,000
30,000
Selling & Distribution cost
15,000
12,000
18,000
The economic life of Machine A is 2 years while it is 3 years for the other two. The scrap values are ?50,000, ?40,000, and ?45,000 respectively. You are required to find out the most profitable investment based on the payback period method.
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