XYZ Ltd has decided to purchase a machine to increase its production capacity. There are...
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Accounting
XYZ Ltd has decided to purchase a machine to increase its production capacity. There are three machines under consideration. The relevant details including estimated yearly expenditure and sales are given below. Assume all sales are on cash. The corporate income-tax rate is 35%. Interest on capital may be assumed to be 9%.
Particulars
Machine A(Rs)
Machine B(Rs)
Machine C(Rs)
Initial investment
2,50,000
2,75,000
3,00,000
Estimated annual sales
4,00,000
4,20,000
4,50,000
Cost of production:
Direct material
50,000
60,000
55,000
Direct labour
40,000
35,000
38,000
Factory overhead
70,000
80,000
75,000
Administration cost
15,000
12,000
14,000
Selling & Distribution cost
8,000
9,000
10,000
The economic life of Machine A is 4 years, Machine B is 5 years, and Machine C is 3 years. The scrap values are Rs.20,000, Rs.15,000, and Rs.25,000 respectively. You are required to find out the most profitable investment based on the payback period method.
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