2. A Company is considering replacing one of existing machine with either a state of the art Automatic Machine which will reduce the labor cost by 80% or with a standard machine. The automatic machine will cost 3,50,000 with an estimated life of 7 years, whereas the standard machine will cost 2,00,000 with an estimated life of 10 year. Both machine have no residual value. Assume tax rate to be 40%. The annual sales and costs are estimated as below:

Calculate the payback period and advice the management.

Automatic Machine Standard Machine ( ) 250,000 Sales Costs: Materials Labour Variable Overheads 250,000 50,000 20,000 25,000 50,000 100,000 15,000