Question: Zenith Tech Ltd is evaluating three machines to boost its production. The details for the machines are as follows. Assume all sales are cash-based. Corporate
Zenith Tech Ltd is evaluating three machines to boost its production. The details for the machines are as follows. Assume all sales are cash-based. Corporate income-tax rate is 32%. Interest on capital may be assumed to be 7%.
Particulars | Machine A1 (₹) | Machine B1 (₹) | Machine C1 (₹) |
Initial investment | 20,00,000 | 22,00,000 | 24,00,000 |
Estimated annual sales | 5,50,000 | 5,00,000 | 6,00,000 |
Cost of production: | |||
Direct material | 45,000 | 40,000 | 50,000 |
Direct labour | 35,000 | 30,000 | 40,000 |
Factory overhead | 55,000 | 50,000 | 65,000 |
Administration cost | 20,000 | 18,000 | 25,000 |
Selling & Distribution cost | 12,000 | 10,000 | 15,000 |
The economic life of Machine A1 is 2 years while it is 3 years for the other two. The scrap values are ₹45,000, ₹35,000, and ₹40,000 respectively. You are required to find the most profitable investment based on the payback period method.
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