MedLife Pharmaceuticals is evaluating three new drug manufacturing machines. The relevant details are as follows. The...
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Accounting
MedLife Pharmaceuticals is evaluating three new drug manufacturing machines. The relevant details are as follows. The corporate tax rate is 27%, and the cost of capital is 8%.
Particulars
Machine M1 (?)
Machine M2 (?)
Machine M3 (?)
Initial investment
5,00,000
4,50,000
6,00,000
Estimated annual sales
6,50,000
6,00,000
7,50,000
Cost of production:
Direct material
55,000
45,000
60,000
Direct labour
65,000
55,000
70,000
Factory overhead
75,000
65,000
80,000
Administration cost
40,000
35,000
45,000
Selling & Distribution cost
30,000
25,000
35,000
The economic life of machine M1 is 3 years, while it is 2 years for the other two. The scrap values are ?50,000, ?40,000, and ?30,000 respectively. Use the payback period method to identify the best investment.
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