Question: Delta Manufacturing Inc is considering purchasing a new machine to meet increasing demand. The relevant details of three machines are provided below. Assume all sales
Delta Manufacturing Inc is considering purchasing a new machine to meet increasing demand. The relevant details of three machines are provided below. Assume all sales are cash transactions. Corporate income-tax rate is 31%. Interest on capital may be assumed to be 8%.
Particulars | Machine X1 (₹) | Machine Y1 (₹) | Machine Z1 (₹) |
Initial investment | 30,00,000 | 34,00,000 | 32,00,000 |
Estimated annual sales | 6,00,000 | 5,50,000 | 6,50,000 |
Cost of production: | |||
Direct material | 55,000 | 50,000 | 65,000 |
Direct labour | 45,000 | 40,000 | 55,000 |
Factory overhead | 70,000 | 65,000 | 80,000 |
Administration cost | 25,000 | 20,000 | 30,000 |
Selling & Distribution cost | 15,000 | 12,000 | 18,000 |
The economic life of Machine X1 is 3 years while it is 4 years for the other two. The scrap values are ₹50,000, ₹40,000, and ₹45,000 respectively. You are required to identify the most profitable investment based on the payback period method.
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts