LMN Industries intends to purchase a machine to expand its production capacity. Three options are...
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Accounting
LMN Industries intends to purchase a machine to expand its production capacity. Three options are being evaluated. The relevant details including estimated yearly expenditure and sales are as follows. Assume all sales are on cash. The corporate income-tax rate is 33%. Interest on capital may be assumed to be 10%.
Particulars
Machine P(Rs)
Machine Q(Rs)
Machine R(Rs)
Initial investment
3,20,000
3,50,000
3,80,000
Estimated annual sales
5,50,000
5,80,000
6,00,000
Cost of production:
Direct material
60,000
55,000
65,000
Direct labour
50,000
45,000
55,000
Factory overhead
75,000
70,000
80,000
Administration cost
18,000
16,000
20,000
Selling & Distribution cost
10,000
9,000
11,000
The economic life of Machine P is 5 years, Machine Q is 4 years, and Machine R is 6 years. The scrap values are Rs.25,000, Rs.20,000, and Rs.30,000 respectively. Calculate the most profitable investment based on the payback period method.
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