Question: JKL Inc. is considering purchasing a new machine to improve production efficiency. Three machines are under review. The details of estimated yearly expenditure and sales
JKL Inc. is considering purchasing a new machine to improve production efficiency. 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 28%. Interest on capital may be assumed to be 6%.
Particulars | Machine X (Rs) | Machine Y (Rs) | Machine Z (Rs) |
Initial investment | 4,50,000 | 3,75,000 | 4,00,000 |
Estimated annual sales | 7,50,000 | 6,75,000 | 7,00,000 |
Cost of production: | |||
Direct material | 65,000 | 60,000 | 62,000 |
Direct labour | 75,000 | 70,000 | 73,000 |
Factory overhead | 85,000 | 80,000 | 83,000 |
Administration cost | 28,000 | 26,000 | 27,000 |
Selling & Distribution cost | 20,000 | 18,000 | 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. 65,000, Rs. 50,000 and Rs. 55,000 respectively. Calculate the most profitable investment based on the payback period method.
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