Question
Vertex Enterprises Ltd is evaluating the purchase of a new machine. The details of three machines are listed below. Assume all sales are cash transactions.
Vertex Enterprises Ltd is evaluating the purchase of a new machine. The details of three machines are listed below. Assume all sales are cash transactions. Corporate income-tax rate is 30%. Interest on capital may be assumed to be 10%.
Particulars | Machine D (₹) | Machine E (₹) | Machine F (₹) |
Initial investment | 35,00,000 | 37,00,000 | 36,00,000 |
Estimated annual sales | 7,00,000 | 6,50,000 | 7,50,000 |
Cost of production: | |||
Direct material | 60,000 | 55,000 | 70,000 |
Direct labour | 50,000 | 45,000 | 60,000 |
Factory overhead | 80,000 | 75,000 | 90,000 |
Administration cost | 30,000 | 25,000 | 35,000 |
Selling & Distribution cost | 20,000 | 18,000 | 25,000 |
The economic life of Machine D is 3 years while it is 4 years for the other two. The scrap values are ₹55,000, ₹45,000, and ₹50,000 respectively. You are required to identify the most profitable investment based on the payback period method.
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Corporate Financial Accounting
Authors: Carl S. Warren, James M. Reeve, Jonathan Duchac
14th edition
130565353X, 978-1305887510, 1305887514, 978-1305653535
