Question: Global Manufacturing Corp is considering purchasing a machine to improve its operational efficiency. The details for three potential machines are listed below. Assume all sales
Global Manufacturing Corp is considering purchasing a machine to improve its operational efficiency. The details for three potential machines are listed below. Assume all sales are cash transactions. Corporate income-tax rate is 28%. Interest on capital may be assumed to be 9%.
Particulars | Machine 1 (₹) | Machine 2 (₹) | Machine 3 (₹) |
Initial investment | 45,00,000 | 50,00,000 | 48,00,000 |
Estimated annual sales | 8,00,000 | 7,50,000 | 8,50,000 |
Cost of production: | |||
Direct material | 70,000 | 65,000 | 80,000 |
Direct labour | 60,000 | 55,000 | 70,000 |
Factory overhead | 90,000 | 85,000 | 1,00,000 |
Administration cost | 35,000 | 30,000 | 40,000 |
Selling & Distribution cost | 25,000 | 22,000 | 30,000 |
The economic life of Machine 1 is 4 years while it is 5 years for the other two. The scrap values are ₹60,000, ₹50,000, and ₹55,000 respectively. You are required to identify the most profitable investment based on the payback period method.
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