GHI Ltd is looking to expand its operations by investing in new machinery. Three options...
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Accounting
GHI Ltd is looking to expand its operations by investing in new machinery. Three options are available. The relevant details including estimated yearly expenditure and sales are given below. All sales are on cash basis. Corporate income-tax rate is 32%. Interest on capital may be assumed to be 10%.
Particulars
Machine A (Rs)
Machine B (Rs)
Machine C (Rs)
Initial investment
3,75,000
4,25,000
4,00,000
Estimated annual sales
6,50,000
7,00,000
6,75,000
Cost of production:
Direct material
55,000
60,000
58,000
Direct labour
65,000
70,000
68,000
Factory overhead
75,000
80,000
78,000
Administration cost
26,000
28,000
27,000
Selling & Distribution cost
18,000
20,000
19,000
The economic life of machine A is 2 years, while it is 3 years for the other two. The scrap values are Rs. 55,000, Rs. 65,000 and Rs. 60,000 respectively. Ascertain the most profitable investment based on the payback period method.
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