MNO Ltd is planning to invest in new machinery to boost production. Three machines are...
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Accounting
MNO Ltd is planning to invest in new machinery to boost production. 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 33%. Interest on capital may be assumed to be 7%.
Particulars
Machine 1 (Rs)
Machine 2 (Rs)
Machine 3 (Rs)
Initial investment
4,25,000
4,00,000
4,75,000
Estimated annual sales
7,00,000
6,50,000
7,50,000
Cost of production:
Direct material
60,000
55,000
65,000
Direct labour
70,000
65,000
75,000
Factory overhead
80,000
75,000
85,000
Administration cost
24,000
22,000
26,000
Selling & Distribution cost
16,000
14,000
18,000
The economic life of machine 1 is 4 years, while it is 3 years for the other two. The scrap values are Rs. 60,000, Rs. 55,000 and Rs. 65,000 respectively. Find out the most profitable investment based on the payback period method.
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