RST Enterprises is evaluating three machines for purchase to meet increasing production demands. The following...
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Accounting
RST Enterprises is evaluating three machines for purchase to meet increasing production demands. The following details are available. Assume all sales are on cash. The corporate income-tax rate is 32%. Interest on capital may be assumed to be 12%.
Particulars
Machine J(Rs)
Machine K(Rs)
Machine L(Rs)
Initial investment
3,50,000
3,80,000
4,00,000
Estimated annual sales
5,00,000
5,50,000
6,00,000
Cost of production:
Direct material
60,000
65,000
70,000
Direct labour
50,000
55,000
60,000
Factory overhead
70,000
75,000
80,000
Administration cost
15,000
18,000
20,000
Selling & Distribution cost
10,000
12,000
15,000
The economic life of Machine J is 4 years, Machine K is 3 years, and Machine L is 5 years. The scrap values are Rs.20,000, Rs.25,000, and Rs.30,000 respectively. Determine the most profitable investment based on the payback period method.
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