Question: STU Ltd is considering purchasing a new machine to improve its manufacturing efficiency. Three machines are under review. The details of estimated yearly expenditure and
STU Ltd is considering purchasing a new machine to improve its manufacturing 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 29%. Interest on capital may be assumed to be 8%.
Particulars | Machine X (Rs) | Machine Y (Rs) | Machine Z (Rs) |
Initial investment | 4,00,000 | 4,50,000 | 4,25,000 |
Estimated annual sales | 6,75,000 | 7,25,000 | 7,00,000 |
Cost of production: | |||
Direct material | 58,000 | 63,000 | 60,000 |
Direct labour | 68,000 | 73,000 | 70,000 |
Factory overhead | 78,000 | 83,000 | 80,000 |
Administration cost | 27,000 | 29,000 | 28,000 |
Selling & Distribution cost | 19,000 | 21,000 | 20,000 |
The economic life of machine X is 3 years, while it is 4 years for the other two. The scrap values are Rs. 60,000, Rs. 65,000 and Rs. 62,000 respectively. Calculate the most profitable investment based on the payback period method.
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