DEF Enterprises plans to upgrade its production line by purchasing a new machine. Three machines...
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Accounting
DEF Enterprises plans to upgrade its production line by purchasing a new machine. Three machines are being considered. The details of estimated yearly expenditure and sales are provided below. All sales are on cash basis. Corporate income-tax rate is 38%. Interest on capital may be assumed to be 7%.
Particulars
Machine 1 (Rs)
Machine 2 (Rs)
Machine 3 (Rs)
Initial investment
3,50,000
4,00,000
3,75,000
Estimated annual sales
5,50,000
6,00,000
5,75,000
Cost of production:
Direct material
45,000
50,000
48,000
Direct labour
55,000
60,000
57,000
Factory overhead
65,000
70,000
68,000
Administration cost
22,000
24,000
23,000
Selling & Distribution cost
14,000
16,000
15,000
The economic life of machine 1 is 3 years, while it is 2 years for the other two. The scrap values are Rs. 45,000, Rs. 55,000 and Rs. 50,000 respectively. Determine the most profitable investment based on the payback period method.
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