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MNO Foods is considering investing in new equipment to boost production. The details for three...

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Accounting

MNO Foods is considering investing in new equipment to boost production. The details for three machines are as follows. Assume all sales are on cash. The corporate income-tax rate is 31%. Interest on capital may be assumed to be 9%.

Particulars

Machine Q(Rs)

Machine R(Rs)

Machine S(Rs)

Initial investment

4,20,000

4,50,000

4,80,000

Estimated annual sales

5,50,000

5,80,000

6,00,000

Cost of production:




Direct material

60,000

65,000

70,000

Direct labour

55,000

60,000

65,000

Factory overhead

75,000

80,000

85,000

Administration cost

22,000

20,000

18,000

Selling & Distribution cost

12,000

14,000

16,000

The economic life of Machine Q is 3 years, Machine R is 5 years, and Machine S is 4 years. The scrap values are Rs.30,000, Rs.25,000, and Rs.35,000 respectively. You are required to find out the most profitable investment based on the payback period method.

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