XYZ Ltd is considering purchasing a new machine to improve its manufacturing process. The company...
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Accounting
XYZ Ltd is considering purchasing a new machine to improve its manufacturing process. The company has three options. The relevant details including estimated yearly expenditure and sales are given below. All sales are on cash basis. Corporate income-tax rate is 30%. Interest on capital may be assumed to be 9%.
Particulars
Machine X (Rs)
Machine Y (Rs)
Machine Z (Rs)
Initial investment
5,00,000
4,00,000
6,00,000
Estimated annual sales
7,00,000
6,50,000
8,00,000
Cost of production:
Direct material
60,000
55,000
70,000
Direct labour
70,000
60,000
75,000
Factory overhead
80,000
70,000
90,000
Administration cost
30,000
25,000
35,000
Selling & Distribution cost
20,000
15,000
25,000
The economic life of machine X is 4 years, while it is 3 years for the other two. The scrap values are Rs. 60,000, Rs. 50,000 and Rs. 70,000 respectively. Calculate the most profitable investment based on the payback period method.
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