Question
GHI Manufacturing is planning to invest in new equipment to boost production efficiency. The financial details of the three machines being considered are provided below.
GHI Manufacturing is planning to invest in new equipment to boost production efficiency. The financial details of the three machines being considered are provided below. The corporate tax rate is 28%, and the interest on capital is 11%.
Particulars | Machine P (Rs) | Machine Q (Rs) | Machine R (Rs) |
Initial Investment | 7,00,000 | 8,00,000 | 9,00,000 |
Estimated Annual Sales | 10,00,000 | 11,00,000 | 12,00,000 |
Cost of Production: | |||
Direct Material | 90,000 | 1,00,000 | 1,10,000 |
Direct Labour | 1,00,000 | 1,10,000 | 1,20,000 |
Factory Overhead | 1,20,000 | 1,30,000 | 1,40,000 |
Administration Cost | 45,000 | 50,000 | 55,000 |
Selling & Distribution Cost | 35,000 | 40,000 | 45,000 |
The economic life of Machine P is 6 years, while it is 7 years for the other two. The scrap values are Rs. 80,000, Rs. 90,000, and Rs. 1,00,000 respectively. Using the payback period method, identify the most cost-effective investment.
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Horngrens Accounting
Authors: Tracie L. Miller Nobles, Brenda L. Mattison, Ella Mae Matsumura
11th edition
978-0133851151, 013385115X, 978-0133866889
