Question
Alpha Industries Ltd wants to upgrade its machinery to increase production. Three machines are being considered, with details as below. Assume all sales are cash
Alpha Industries Ltd wants to upgrade its machinery to increase production. Three machines are being considered, with details as below. Assume all sales are cash transactions. Corporate income-tax rate is 33%. Interest on capital may be assumed to be 11%.
Particulars | Machine M (₹) | Machine N (₹) | Machine O (₹) |
Initial investment | 32,00,000 | 35,00,000 | 34,00,000 |
Estimated annual sales | 6,50,000 | 6,00,000 | 7,00,000 |
Cost of production: | |||
Direct material | 55,000 | 50,000 | 60,000 |
Direct labour | 45,000 | 40,000 | 50,000 |
Factory overhead | 75,000 | 70,000 | 85,000 |
Administration cost | 28,000 | 25,000 | 30,000 |
Selling & Distribution cost | 18,000 | 15,000 | 20,000 |
The economic life of Machine M is 3 years while it is 4 years for the other two. The scrap values are ₹48,000, ₹38,000, and ₹43,000 respectively. You are required to determine the most profitable investment based on the payback period method.
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Financial Accounting
Authors: David Spiceland, Wayne Thomas, Don Herrmann
4th edition
1259307956, 978-1259307959
