OPQ Corporation is planning to invest in new machinery to enhance its production capabilities. There...
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Accounting
OPQ Corporation is planning to invest in new machinery to enhance its production capabilities. There are three machines under consideration. The relevant details including estimated yearly expenditure and sales are provided below. Assume all sales are on cash. The corporate income-tax rate is 37%. Interest on capital may be assumed to be 8%.
Particulars
Machine U(Rs)
Machine V(Rs)
Machine W(Rs)
Initial investment
4,00,000
3,80,000
4,20,000
Estimated annual sales
5,00,000
5,20,000
5,60,000
Cost of production:
Direct material
65,000
70,000
75,000
Direct labour
55,000
60,000
50,000
Factory overhead
80,000
85,000
90,000
Administration cost
22,000
20,000
18,000
Selling & Distribution cost
12,000
14,000
16,000
The economic life of Machine U is 3 years, Machine V is 5 years, and Machine W is 4 years. The scrap values are Rs.35,000, Rs.30,000, and Rs.40,000 respectively. You are required to find out the most profitable investment based on the payback period method
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