YZA Ltd is considering purchasing a new machine to enhance production capacity. Three machines are...
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Accounting
YZA Ltd is considering purchasing a new machine to enhance production capacity. Three machines are under review. The details of estimated yearly expenditure and sales are provided below. All sales are on cash basis. Corporate income-tax rate is 31%. Interest on capital may be assumed to be 8%.
Particulars
Machine X (Rs)
Machine Y (Rs)
Machine Z (Rs)
Initial investment
4,00,000
4,25,000
4,50,000
Estimated annual sales
6,50,000
7,00,000
6,75,000
Cost of production:
Direct material
58,000
60,000
59,000
Direct labour
68,000
70,000
69,000
Factory overhead
78,000
80,000
79,000
Administration cost
27,000
28,000
28,000
Selling & Distribution cost
19,000
20,000
19,000
The economic life of machine X is 3 years, while it is 4 years for the other two. The scrap values are Rs. 55,000, Rs. 60,000 and Rs. 65,000 respectively. Find out the most profitable investment based on the payback period method.
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